Liquidity Risk and Institutional Ownership
54 Pages Posted: 17 Nov 2011 Last revised: 20 Oct 2015
Date Written: May 5, 2014
Abstract
Institutional ownership affects the sensitivity of stock returns to changes in market liquidity (liquidity risk). Overall, institutional ownership lowers the liquidity risk of stocks. However, different types of institutions affect liquidity risk in opposite ways. Stocks held by hedge funds, especially levered hedge funds, as marginal investors are more sensitive to changes in market liquidity than comparable stocks held by other types of institutions or by individuals. In contrast, stocks held by banks are less sensitive to changes in aggregate liquidity. These findings are robust to alternative specifications that control for institutional preferences for different stock characteristics and risk.
Keywords: Liquidity risk, institutional investors, hedge funds
JEL Classification: G14, G23
Suggested Citation: Suggested Citation
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