Working Paper: NBER ID: w22247
Authors: Itzhak Bendavid; Francesco Franzoni; Rabih Moussawi; John Sedunov
Abstract: Large institutional investors own an increasing share of the 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 greater fragility in times of crisis. 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. Thus, large institutions trade larger volumes and induce greater price impact.
Keywords: Institutional Investors; Market Volatility; Price Impact
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 |
|---|---|
| Ownership by large institutional investors (G23) | Higher stock price volatility (G19) |
| Ownership by large institutional investors (G23) | Greater noise in stock prices (G19) |
| Higher institutional ownership (G32) | Larger price drops during market turmoil (G19) |
| Correlated trading behaviors of large institutions (G41) | Greater price impacts (F69) |
| Correlated behavior of subunits within institutions (D02) | Increased volatility (E32) |
| Trading volume and strategies of large institutions (G15) | Significant effects on stock prices (G14) |