Nº 20-56: Do Institutional Investors Stabilize Equity Markets in Crisis Periods? Evidence from COVID-19

During the COVID-19 market crash, U.S. stocks with higher and more active institutional ownership performed worse. The effect was stronger when institutional investors experienced larger client outflows and held more financially exposed portfolios. This relation holds even when controlling for changes in analysts' earnings forecasts, suggesting that stocks held more by institutions exhibited a larger wedge between stock price drops and firm fundamentals. Portfolio changes through the first quarter of 2020 reveal that institutional investors prioritized corporate financial strength over "soft" environmental and social performance. Trading data from a large discount brokerage (Robinhood) confirm that retail investors acted as liquidity providers. Overall, the results suggest that when a tail risk realizes, institutional investors amplify price crashes by fire-selling and seeking shelter in "hard" measures of firm resilience.