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 July 2020
NBER Program(s):Asset Pricing, Corporate Finance

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.

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Document Object Identifier (DOI): 10.3386/w22247

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