Do Institutional Investors Stabilize Equity Markets in Crisis Periods? Evidence from Covid-19
65 Pages Posted: 28 Jul 2020 Last revised: 27 May 2022
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Do Institutional Investors Stabilize Equity Markets in Crisis Periods? Evidence from COVID-19
Date Written: July 2020
Abstract
During the COVID-19 crash, U.S. stocks with higher institutional ownership performed worse. This under-performance was unrelated to revisions in earnings expectations, which suggests a disconnect between stock prices and firm fundamentals. Two mechanisms were at play: Institutions faced a sudden increase in redemptions and simultaneously attempted to de-risk their portfolios. Most types of institutional investors re-balanced portfolios toward financially strong firms, whereas hedge funds sold stocks indiscriminately. At least some retail investors (e.g., Robinhood investors) appear to have provided liquidity. Overall, the results suggest that when a tail risk realizes, institutional investors amplify price crashes.
Keywords: Coronavirus, corporate cash holdings, Corporate Debt, COVID-19, ESG, fire sales, Institutional Ownership, leverage, Retail investors, tail risk
JEL Classification: G01, G12, G14, G32
Suggested Citation: Suggested Citation
Simon Glossner (Contact Author)
Board of Governors of the Federal Reserve System ( email )
20th Street and Constitution Avenue NW
Washington, DC 20551
United States
Swiss Finance Institute ( email )
c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland