The Information Advantage of Industry Common Blockholders and Its Stabilizing Effect on Stock Price Crash Risk

Abstract

Institutional investors’ common blockholdings within an industry produce an information advantage, allowing them to differentiate between the industry-wide and firm-specific nature of bad news released by peer firms and avoiding selling on false spillover signals (i.e., “panic exit”), which in turn reduces future stock price crash risk. This evidence is in sharp contrast with the evidence that total institutional ownership increases firm-level stock price crash risk. Our study highlights the economic value of common owners in the stock markets: Their information advantage provides a stabilizing effect against contagion.

Keywords: Institutional Investor; Blockholder; Common Ownership; Stock Price Crash Risk; Contagion

JEL Classification: G12, G14, G34, M41