Fire Sales and Inside Information: When Insiders Help

Abstract

We study how information flows within international financial conglomerates and how such a flow reduces the transmission of liquidity crisis due to fire-sales. We focus on the role of international institutional investors affiliated with banks during the 2008-2009 global financial crisis. We argue that affiliation with banks provides international asset managers with an information advantage that lowers their incentive to herd with the uninformed fire-sales as the crisis emerges. This effectively provides price support to foreign stocks. We test this intuition using a comprehensive sample of non-North American firms with detailed information on international institutional holdings. We show that bank affiliation provides an informational advantage that more than offsets the disadvantages of foreign investors due to geography. During the crisis, the bank-affiliated investors increase stock liquidity, reduce extreme negative return realizations, lower short-selling demand and increase price informativeness.