Working Paper: CEPR ID: DP13427
Authors: Francesco Franzoni; Itzhak Bendavid; Rabih Moussawi; John Sedunov
Abstract: Large institutional investors own an increasing share of equity markets in the U.S. The implications of this development for financial markets are still unclear. The paper presents novel empirical evidence that ownership by large institutions predicts higher volatility and greater noise in stock prices, as well as more fragility at times of crisis. Evidence from a natural experiment suggests a causal interpretation of this effect. When studying the channel, we find that large institutional investors exhibit traits of granularity, i.e. subunits within a firm display correlated behavior, which reduces diversification of idiosyncratic shocks.
Keywords: institutional investors; concentration; granularity; fire sales; liquidity
JEL Codes: G01; G12; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| large institutional ownership (G32) | greater noise in stock prices (G19) |
| large institutional ownership (G32) | larger price drops during crises (G01) |
| large institutional ownership (G32) | negatively correlated autocorrelation of returns (C10) |
| large institutional ownership (G32) | stock price volatility (G17) |
| ownership by the largest ten institutions (G21) | stock price volatility (G17) |