During the coronavirus market crash, U.S. stocks with higher institutional ownership experienced worse performance, especially those held by active, short-term and domestic institutions, according to a recent paper.

Institutional ownership of U.S. stocks has risen to massive levels, comprising 75 per cent of stock ownership overall, noted the paper by researchers at the University of Virginia and the University of Zurich.

This scale creates the possibility for tandem movements among institutional owners, causing them to sell en masse in a crisis situation, creating “a fire-sales externality that further exacerbates a crash,” the paper said.

The possibility of a pandemic, meanwhile, wasn’t something many institutional owners had made material preparations for, the paper said. “It is, therefore, unlikely that institutional investors were able to pre-position themselves by avoiding stocks that would be hit hardest by the the COVID-19 economic contraction. In the early phases of the outbreak, even after human-to-human transmission of the novel coronavirus was confirmed (on January 20) . . . institutional ownership was not significantly associated with stock returns. However, after European countries and then the U.S. introduced lockdowns and businesses were affected, stock prices experienced a historically fast and furious decline.”

The research found that institutional ownership, during the so-called fever period of the crash, was negatively related to a stock’s performance, net of other potential effects such as a stock’s cash, leverage, environmental or social performance and other characteristics material to the given industry or company.

As for changes, between the end of the last quarter of 2019 and the end of the first quarter of 2020, firm-level institutional ownership shifts were more pronounced and skewed in a negative direction when compared to the quarter prior. “Moreover, we find that these changes are more pronounced for non-S&P 500 companies than for S&P 500 constituent stocks; and they are more prominent for active institutional investors than for passive investors.”

And where did different types of investors go when disaster hit? Examining shifts in holdings during the first quarter of 2020, the paper found hedge funds sold equities indiscriminately. However other groups of institutional investors, including mutual funds, investment advisors and pension funds preferred stocks with strong financials, such as low debt and high cash, and no group of institutional investors made a clear portfolio tilt towards stocks with better environmental or social performance. “Overall, the results suggest that when a tail risk realizes, institutional investors express a preference for “hard”’ measures of firm resilience.”

And as institutional investors were selling, retail investors were providing liquidity to the market. While retail investor activity is harder to track, the paper used the popularity of given stocks on the retail trading platform Robinhood Markets Inc., a commission-free platform with more than 10 million users as of the end of 2019, as a proxy for the retail segment of the market.

“We find that the change in the number of [Robinhood] investors in individual stocks over the first quarter of 2020 exhibited opposite patterns to the changes in institutional ownership. In particular, in March 2020, retail interest substantially increased for stocks with high leverage and low cash holdings.”