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The role of institutional investors and individual investors in financial markets: Evidence from closed‐end funds
Author(s) -
Huang Emily J.
Publication year - 2015
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2015.05.001
Subject(s) - institutional investor , business , volatility (finance) , monetary economics , closed end fund , global assets under management , financial market , finance , economics , financial system , market liquidity , corporate governance
I use closed‐end funds as a unique research tool to explore whether institutional investors are a stabilizing or a destabilizing force in financial markets. If institutional investors stabilize the market by trading against mispricing, then they should purchase closed‐end funds selling at a wide discount and sell funds selling at a large premium. Consistent with the market‐stabilizer hypothesis, I document that wide‐discount funds experience a higher subsequent institutional demand than premium funds do. Moreover, my findings that an increase in institutional ownership forecasts a decrease in the volatility of discount returns support the proposition that institutional trading reduces noise trader risk. In sum, the results suggest that institutional investors play a price‐stabilizing role in financial markets.