NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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The Granular Nature of Large Institutional Investors

Itzhak Ben-David, Francesco Franzoni, Rabih Moussawi, John Sedunov

NBER Working Paper No. 22247
Issued in May 2016, Revised in December 2017
NBER Program(s):Asset Pricing, Corporate Finance

Large institutional investors own an increasing share of equity markets. We conjecture that a financial market in which large institutions dominate operates differently than a market populated by smaller independent investors. To support this view, we show that funds within the same family display higher correlation in flows and investment strategies. As a result, large institutions are likely to impose greater liquidity demand on the stocks they trade. Accordingly, we find that ownership and trades by large institutions lead to higher volatility and to increased return and liquidity comovement. Moreover, during times of market turmoil, stocks with higher ownership by large institutions display significantly larger price drops.

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Document Object Identifier (DOI): 10.3386/w22247

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