How Do Institutional Investors React to Geographically Dispersed Information Shocks? A Test Using the COVID-19 Pandemic

We examine how institutional investors react to geographically dispersed local shocks during periods of market turmoil. Using a sample of Real Estate Investment Trusts (REITs) that enables us to link the locations of institutional investors, REIT headquarters, and the locations of assets held by REITs, we find that the ownership of firms with an economic interest in the investor’s home MSA declined more in markets heavily affected by the pandemic. In addition, the responses to shocks in markets where REITs had an economic interest were larger in those markets in which REITs had larger portfolio allocations and in markets that are home to the investors. Importantly, based on the performance of their REIT portfolios after the onset of the COVID-19 shock, our results suggest that some institutional investors may have overreacted to the shock. Our study highlights the importance of geography in the formation of investors’ expectations during market crises.