Abstract
Using a large sample of transaction-level institutional trading data, we investigate the role of institutional investors around the 9/11 terrorist attacks, a sudden exogenous catastrophic shock to financial markets. We find that institutional investors remain net buyers amid large market-wide crisis in the aftermath of 9/11. Furthermore, stocks that are highly bought by institutions earn higher abnormal future returns than stocks that are highly sold. We also examine trading patterns across different types of institutional investors and various industry sectors. Our results suggest that institutional investors act as liquidity providers rather than engaging in panic selling during market crises caused by catastrophic events, and their liquidity provision trading is rational and profitable. Overall, these findings support the market stabilization role played by institutional investors who lend a “steady hand” during high-stress periods in financial markets.
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