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

During the COVID-19 crash, U.S. stocks with higher institutional ownership performed worse. This under-performance is unrelated to revisions in earnings expectations, which suggests a disconnect between stock prices and firm fundamentals. Two mechanisms were at play: Institutions faced a sudden increase in redemptions and simultaneously attempted to de-risk their portfolios. Most types of institutional investors re-balanced portfolios toward financially strong firms, whereas hedge funds sold indiscriminately. Data from a discount brokerage (Robinhood) confirm that retail investors provided liquidity. Overall, the results suggest that when a tail risk realizes, institutional investors amplify price crashes