We investigate whether institutional ownership (IO) plays a role in transmitting systemic risk through banks. We find robust evidence suggesting that IO is positively associated with future systemic risk. We find this relationship is stronger during economic downturns at the economy-wide level, as well as for banks demonstrating greater capital needs. Our results also suggest a trading mechanism through which active, and transient institutions in particular, play a role in propagating systemic risk. We find the relationship exists when there is both overlapping and non-overlapping ownership of banks, and the result is concentrated when there are low monitoring incentives for institutional owners. Furthermore, we find disclosure may play a role in mitigating the transmission of systemic risk by institutional investors. Overall, our results should be of interest to regulators, who have called for institutional investors to play a larger role in bank monitoring, and more broadly to the academic literature that tends to assume the benefits of IO without adequate consideration of the potential costs.
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