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The Granular Nature of Large Institutional Investors

Author

Listed:
  • Itzhak Ben-David
  • 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.

Suggested Citation

  • Itzhak Ben-David & Francesco Franzoni & Rabih Moussawi & John Sedunov, 2016. "The Granular Nature of Large Institutional Investors," NBER Working Papers 22247, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:22247
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    Cited by:

    1. Stefano Ramelli & Alexander F. Wagner & Richard J. Zeckhauser & Alexandre Ziegler, 2018. "Investor Rewards to Climate Responsibility: Evidence from the 2016 Climate Policy Shock," NBER Working Papers 25310, National Bureau of Economic Research, Inc.
    2. Ralph S. J. Koijen & Robert J. Richmond & Motohiro Yogo, 2020. "Which Investors Matter for Equity Valuations and Expected Returns?," NBER Working Papers 27402, National Bureau of Economic Research, Inc.
    3. Crane, Alan D. & Koch, Andrew & Michenaud, Sébastien, 2019. "Institutional investor cliques and governance," Journal of Financial Economics, Elsevier, vol. 133(1), pages 175-197.
    4. Engljähringer, Hannah Katharina & Stracca, Livio, 2020. "Firm-specific shocks and contagion: are banks special?," Working Paper Series 2481, European Central Bank.
    5. Mathias S. Kruttli & Phillip J. Monin & Sumudu W. Watugala, 2017. "Investor Concentration, Flows, and Cash Holdings: Evidence from Hedge Funds," Working Papers 17-07, Office of Financial Research, US Department of the Treasury.
    6. Itzhak Ben-David & Francesco A. Franzoni & Rabih Moussawi, 2016. "Exchange Traded Funds (ETFs)," Swiss Finance Institute Research Paper Series 16-64, Swiss Finance Institute.
    7. Mark L. Egan & Alexander MacKay & Hanbin Yang, 2020. "Recovering Investor Expectations from Demand for Index Funds," NBER Working Papers 26608, National Bureau of Economic Research, Inc.
    8. Ramelli, Stefano & Wagner, Alexander F. & Zeckhauser, Richard J. & Ziegler, Alexandre, 2018. "Stock Price Rewards to Climate Saints and Sinners: Evidence from the Trump Election," Working Paper Series rwp18-037, Harvard University, John F. Kennedy School of Government.
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    11. Abramova, Inna & Core, John & Sutherland, Andrew, 2019. "Institutional Investor Attention and Firm Disclosure," MPRA Paper 93665, University Library of Munich, Germany.
    12. Alfaro, Laura & Asis, Gonzalo & Chari, Anusha & Panizza, Ugo, 2019. "Corporate debt, firm size and financial fragility in emerging markets," Journal of International Economics, Elsevier, vol. 118(C), pages 1-19.
    13. Lysle Boller & Fiona Scott Morton, 2020. "Testing the Theory of Common Stock Ownership," NBER Working Papers 27515, National Bureau of Economic Research, Inc.
    14. Matthew Backus & Christopher Conlon & Michael Sinkinson, 2019. "Common Ownership in America: 1980-2017," NBER Working Papers 25454, National Bureau of Economic Research, Inc.
    15. Mathias S. Kruttli & Phillip J. Monin & Sumudu W. Watugala, 2017. "Investor Concentration, Flows, and Cash Holdings : Evidence from Hedge Funds," Finance and Economics Discussion Series 2017-121, Board of Governors of the Federal Reserve System (U.S.).

    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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