The Influence of Institutional Investors on the Incorporation of Market and Firm-Specific Information into Stock Prices and Crash Risk

The aim of this paper is to investigate the influence of institutional ownership on stock price synchronicity and crash risk. Using a logistic transformation of R² as a measure of stock price synchronicity and Down-Up volatility as a measure of crash risk. We find that institutional ownership is negatively affected firms’ stock price synchronicity because institutional transactions improve the flow of firm-specific information into individual stock prices. Moreover, institutional monitoring mitigates managerial bad-news hoarding, which results in a stock price crash when the accumulated bad news is finally released. As a result, institutional ownership is negatively affected firms’ crash risk.