Poon, Ser-Huang Rockinger, Michael Stathopoulos, Konstantinos
Year of Publication:
Manchester Business School Working Paper 623
During the financial crisis in 2007-8, the quoted spread for the average S&P 1500 firm increased by 50%, while the systematic liquidity risk increased by 34%. We find that the trading of a firm's equity by institutional investors increased the firms' quoted spreads, and led to a higher liquidity commonality during the crisis. Institutional sell-side herding contributed strongly to both effects. Our results are robust to different specifications and consistent with theoretical and anecdotal evidence regarding the role of herding during a crisis.