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The Granular Nature of Large Institutional Investors

Author

Listed:
  • Itzhak Ben-David

    (Fisher Business School, The Ohio State University, Columbus, Ohio 43210; National Bureau of Economic Research, Boston, Massachusetts 02138)

  • Francesco Franzoni

    (Università della Svizzera Italiana, 6900 Lugano, Switzerland; Swiss Finance Institute, CH-1211 Geneva 4, Switzerland)

  • Rabih Moussawi

    (Villanova School of Business, Villanova University, Villanova, Pennsylvania 19085; Wharton Research Data Services, Philadelphia, Pennsylvania 19104)

  • John Sedunov

    (Villanova School of Business, Villanova University, Villanova, Pennsylvania 19085)

Abstract

Large institutional investors own an increasing share of the equity markets in the United States. 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.

Suggested Citation

  • Itzhak Ben-David & Francesco Franzoni & Rabih Moussawi & John Sedunov, 2021. "The Granular Nature of Large Institutional Investors," Management Science, INFORMS, vol. 67(11), pages 6629-6659, November.
    • Handle: RePEc:inm:ormnsc:v:67:y:2021:i:11:p:6629-6659
    DOI: 10.1287/mnsc.2020.3808
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    9. Aiken, Adam L. & Kang, Minjeong, 2023. "Hedge fund manager timing and selectivity skill over time. A holdings-based estimate," Finance Research Letters, Elsevier, vol. 58(PB).
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