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Do Institutional Investors Stabilize Equity Markets in Crisis Periods? Evidence from COVID-19

Author

Listed:
  • Simon Glossner

    (Board of Governors of the Federal Reserve System, Washington, District of Columbia 20551)

  • Pedro Matos

    (Darden School of Business, University of Virginia, Charlottesville, Virginia 22903; and European Corporate Governance Institute (ECGI), 1000 Brussels, Belgium)

  • Stefano Ramelli

    (School of Finance, University of St. Gallen, 9000 St. Gallen, Switzerland; and Swiss Finance Institute, 8006 Zurich, Switzerland)

  • Alexander F. Wagner

    (European Corporate Governance Institute (ECGI), 1000 Brussels, Belgium; and Swiss Finance Institute, 8006 Zurich, Switzerland; and Department of Finance, University of Zurich, 8032 Zurich, Switzerland; and Centre for Economic Policy Research (CEPR), London EC1V 0DX, United Kingdom; and Center for Crisis Competence, University of Zurich, 8032 Zurich, Switzerland)

Abstract

During the COVID-19 stock market crash, U.S. stocks with higher institutional ownership (IO) performed worse than those with lower IO. By studying firm-level changes, we identify two mechanisms behind this effect: a sudden downscaling of institutional capital in the equity market and a collective attempt by institutions to reposition their equity portfolios toward more COVID-resilient stocks. The stock price effects of their “portfolio downscaling” trades quickly reversed in the market’s recovery phase, whereas those of their “portfolio repositioning” trades lingered. The institutional rush for firm resilience also caused price pressures, with retail investors providing liquidity to stocks sold by institutional investors, both during the crisis and afterward. Overall, our results indicate that when a tail risk is realized, institutional investors amplify price crashes.

Suggested Citation

  • Simon Glossner & Pedro Matos & Stefano Ramelli & Alexander F. Wagner, 2025. "Do Institutional Investors Stabilize Equity Markets in Crisis Periods? Evidence from COVID-19," Management Science, INFORMS, vol. 71(10), pages 8623-8641, October.
    • Handle: RePEc:inm:ormnsc:v:71:y:2025:i:10:p:8623-8641
    DOI: 10.1287/mnsc.2022.03411
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