Massimo Massa is the Rothschild Professor of Banking and a Professor of Finance at INSEAD; David Schumacher is an Assistant Professor of Finance at the Desautels Faculty of Management at McGill University; and Yan Wang is an Assistant Professor of Finance at the DeGroote School of Business at McMaster University. This post is based on their recent paper, forthcoming in the Review of Financial Studies, and their recent working paper.
The global asset management industry continues to consolidate and a small number of very large asset managers play an increasingly dominant role. At the same time, one of the main folk theorems in finance posits that asset managers do not pose a risk to financial market stability because they are not levered. This lack of leverage could make concentrated stock ownership in the hands of big asset management families a source of stock price stability.
In our research, we investigate if the rise of large asset managers like BlackRock and others raises concerns about financial market stability. We ask the following questions: Does the rise of such large asset management firms induce “fear of financial fragility” in other market participants? If so, how do these other market participants respond to such fear and how does the market overall adjust as a result? Moreover, what are the corporate implications for firms with “fragile” stocks?