Global volatility and firm-level capital flows

We study the impact of global volatility on the equity portfolio flows of institutional investors worldwide. Aggregate equity allocations of institutional investors decrease during periods of high volatility, both in developed and, even more strongly, in emerging markets. Our granular portfolio-level data allows us to uncover disaggregated investor responses that are an order of magnitude larger than aggregate estimates, and are dominated by discretionary (investor-driven) component of flows. We further show that periods of high volatility are associated with portfolio rebalancing by institutional investors from small-cap to large-cap stocks. Finally, institutional flows have significant impact on future firm stability, measured by their volatility and liquidity. Our findings are consistent with the economic mechanism in which investors with heterogeneous information capacity are learning about assets with different information rents.