NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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
NBER Program(s):AP, CF

Over the last four decades, the concentration of institutional assets in equity markets has increased dramatically. We conjecture that large institutions are granular, that is, they cannot be reduced to a collection of smaller independent entities. Hence, the paper studies whether large institutional ownership has a significant impact on asset prices. We provide evidence of a causal effect of ownership by large institutions on the volatility of their stock holdings. As a potential channel for this effect, we show that large institutions generate higher price impact than smaller institutions. Their trades are larger and concentrated on fewer stocks than those of smaller firms. Moreover, the investor flows to units within the same family are more correlated than the flows to independent entities. Finally, the effect of large institutions on volatility is unlikely to be related to improved price discovery, because the stocks owned by large institutions exhibit stronger price inefficiency.

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Document Object Identifier (DOI): 10.3386/w22247

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