Institutional granular impact is benign on asset sales and price efficiency

We construct two types of trading shocks and examine their effects on stock prices. Common shocks capture the shared trading activity across funds, whereas granular idiosyncratic shocks place emphasis on large players. Common shocks related to stock sales exhibit a significantly stronger price impact than those related to purchases, in contrast to symmetric effects of purchases and sales for granular idiosyncratic shocks. The initial price impact persists in the short run and partially reverses after six months, suggesting underreaction to institutional trading. Our results underscore the impact of the common component across various funds on asset prices and market efficiency. • We apply the “granular instrumental variables” framework to construct two types of trading shocks and estimate their heterogeneous price impact. • We find that common shocks related to stock sales exhibit a stronger price impact than those related to purchases, in contrast to the symmetric effects observed with granular idiosyncratic shocks. • We find that common shocks tend to underreact to public information, while granular idiosyncratic shocks do not. • We find that the asymmetric effects of trading are primarily driven by ETFs and passive mutual funds, whereas underreaction is strongest for active mutual funds.