New research finds that joint shareholding by institutions can reduce stock market risk
Institutional investors have an "information advantage" that can help judge the nature of bad news.
Critics attack BlackRockThe growing influence of index fund giants, but may have ignored their power to prevent stock market disasters.
A paper by US and Chinese scholars released this week shows that institutions with large holdings of shares by companies in a number of industries are less likely to experience panic selling.
Using nearly four decades of US data, they found that these institutional investors are a stabilizing force because they can figure out whether stock market volatility is caused by the woes of specific companies or industries.
The above research is about asset management companies in the financial sector.A timely supplement to the debate over whether or not to have too much influence. Just last week, BlackRock's second-quarter results showed it had a record $9.5 trillion under management and its exchange-traded funds controlled more than $3,000bn for the first time.
The rise in these holdings has raised concerns that market volatility could intensify because, in most cases, these funds are passive and tend to act in unison. But the paper, entitled "Information advantage of institutional co-owners: evidence from the risk of share price collapse", draws the opposite conclusion.
"our findings support the role of institutional co-owners as stabilizers in the market because of their information advantages," the scholars wrote. This allows fund managers to "better distinguish between company-specific and industry-wide bad news, so avoid selling when there is a false signal," the authors say.
Qingyuan Li of Wuhan University, Xiaoran Ni of Xiamen University, P. Eric Yeung of Cornell University and Sirui Yin of the University of Miami studied ownership data and market trends between 1980 and 2017. The shareholding of institutional owners rose from 10 per cent to more than 80 per cent during this period.
These academics have found that companies with at least one co-owner institution as shareholders have a significantly lower risk of share price collapse-whether share prices will fall sharply in the coming year-than companies without similar institutional shareholders. This theory holds that co-owners will not sell in panic because they can better distinguish between corporate-level crises and industry-wide risks.
"some professional investors believe that passive 'indexation' strategies hinder price discovery and may increase the risk of collapse because of pricing errors," the authors write, but this is "not consistent with the impact of co-ownership".
"Big three"
The article comes at a time when Wall Street's so-called "Big three" asset managers are more influential than ever.
BlackRock, pioneer and state street together own an average of about 22% of the s & p 500, up from 13.5% in 2008, according to data compiled by Bloomberg.
At the same time, in a noteworthy study that also used data from 1980 to 2017, the three professors found that the rise of super-large shareholders was making US companies less willing to compete with each other.
But research using aviation data this year shows that this is true when co-owners are in one industry, but not when investors hold positions across multiple industries. In other words, the ownership of the Big three will lead to a reduction in the price of air tickets borne by consumers.