Template-Type: ReDIF-Paper 1.0
Title: The Causal Effect of Institutional Ownership on Firm Level Risk Characteristics
Author-Name: Farid Radmehr
Author-Name: Tolga Cenesizoglu
Creation-date: 2019
Abstract: We establish the causal effect of institutional ownership on a firm’s total risk and its systematic and idiosyncratic components using Russell 2000 index membership as an instrument for institutional ownership following (Crane, Michenaud, and Weston, 2016). We find that for a median Russell 1000 firm, a one standard deviation increase in institutional ownership in a given quarter causes a decrease in idiosyncratic volatility of 13.3% in annualized terms, which results in a decrease in total volatility of 12.8%. Institutional investors achieve this effect on a firm’s risk characteristics partially through their effect on its financial performance, as measured by unexpected earnings. More precisely, an increase in institutional ownership increases a firm’s financial performance, which turns to a decrease in its total and idiosyncratic volatility.
Classification-JEL: G11, G20
Keywords: Institutional investors, Risk characteristics, Russell Index
File-URL: http://ire.hec.ca/wp-content/uploads/2019/03/cahier_IRE_2_causal_effect_institutional_ownership_risk.pdf
File-Format: application/pdf
File-Size: 1500
Handle: RePEc:rsi:irersi:2