Working Paper: CEPR ID: DP15070
Authors: Simon Glossner; Pedro Pinto Matos; Stefano Ramelli; Alexander F. Wagner
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: Corporate cash holdings; Coronavirus; Corporate debt; COVID-19; ESG; Fire sales; Institutional ownership; Leverage; Retail investors; Tail risk
JEL Codes: G01; G12; G14; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Institutional Investors Redemptions (G23) | Stock Selling (G12) |
| Institutional Investors Portfolio Rebalancing (G23) | Stock Selling (G12) |
| Institutional Ownership (IO) (L20) | Forced Liquidations (G33) |
| Retail Investors Providing Liquidity (G24) | Counteracting Selling Pressure (E44) |
| Institutional Ownership (IO) (L20) | Price Crashes (E30) |
| Institutional Ownership (IO) (L20) | Stock Returns (G12) |