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The Granular Nature of Large Institutional Investors

Author

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  • 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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    2. Gormley, Todd A. & Gupta, Vishal K. & Matsa, David A. & Mortal, Sandra C. & Yang, Lukai, 2023. "The Big Three and board gender diversity: The effectiveness of shareholder voice," Journal of Financial Economics, Elsevier, vol. 149(2), pages 323-348.
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    4. Chen, Shenglan & Ma, Hui & Wu, Qiang & Zhang, Hao, 2023. "Does common ownership constrain managerial rent extraction? Evidence from insider trading profitability," Journal of Corporate Finance, Elsevier, vol. 80(C).
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    6. Kristopher Gerardi & Michelle Lowry & Carola Schenone, 2023. "A Critical Review of the Common Ownership Literature," FRB Atlanta Working Paper 2023-17, Federal Reserve Bank of Atlanta.
    7. Glebkin, Sergei & Kuong, John Chi-Fong, 2023. "When large traders create noise," Journal of Financial Economics, Elsevier, vol. 150(2).
    8. 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).
    9. Kurtović, Hrvoje & Markarian, Garen, 2024. "Tail risks and private equity performance," Journal of Empirical Finance, Elsevier, vol. 75(C).

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