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The Causal Effect of Institutional Ownership on Firm Level Risk Characteristics

Author

Listed:
  • Farid Radmehr
  • Tolga Cenesizoglu

Abstract

We establish the causal effect of institutional ownership on a firm’s total risk and its systematic and idiosyncratic components using Russell 2000 index membership as an instrument for institutional ownership following (Crane, Michenaud, and Weston, 2016). We find that for a median Russell 1000 firm, a one standard deviation increase in institutional ownership in a given quarter causes a decrease in idiosyncratic volatility of 13.3% in annualized terms, which results in a decrease in total volatility of 12.8%. Institutional investors achieve this effect on a firm’s risk characteristics partially through their effect on its financial performance, as measured by unexpected earnings. More precisely, an increase in institutional ownership increases a firm’s financial performance, which turns to a decrease in its total and idiosyncratic volatility.

Suggested Citation

  • Farid Radmehr & Tolga Cenesizoglu, 2019. "The Causal Effect of Institutional Ownership on Firm Level Risk Characteristics," Cahiers de recherche / Working Papers 2, Institut sur la retraite et l'épargne / Retirement and Savings Institute.
    • Handle: RePEc:rsi:irersi:2
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    References listed on IDEAS

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    More about this item

    Keywords

    Institutional investors; Risk characteristics; Russell Index;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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