On the Rationality of Institutional Investors: The Case of Major Industrial Accidents

Abstract

To determine if institutional investors act more rationally than individual investors, we examine the stock market price drop following 173 major industrial accidents from 1959 to 2017. In most cases, this drop, generally considered excessive, rapidly reverses. Using meta-analysis techniques, we distinguish events likely to trigger a large negative mid-term market reaction (potentially destructive events) from other events. For firms with large institutional holdings, we show that the market drop following potentially destructive events (potentially nondestructive events) is significantly larger (smaller). This is consistent with the hypothesis that investors’ potential irrational reaction depends on their sophistication.

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