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Is There a Dark Side to Exchange Traded Funds? An Information Perspective

56 Pages Posted: 3 Jul 2015 Last revised: 9 Aug 2017

Doron Israeli

Interdisciplinary Center (IDC) Herzliya - Arison School of Business

Charles M.C. Lee

Stanford University - Graduate School of Business

Suhas A. Sridharan

Emory University - Goizueta Business School

Date Written: January 13, 2017

Abstract

We examine whether an increase in ETF ownership is accompanied by a decline in pricing efficiency for the underlying component securities. Our tests show an increase in ETF ownership is associated with: (1) higher trading costs (bid-ask spreads and market liquidity); (2) an increase in “stock return synchronicity”; (3) a decline in “future earnings response coefficients”; and (4) a decline in the number of analysts covering the firm. Collectively, our findings support the view that increased ETF ownership can lead to higher trading costs and lower benefits from information acquisition. This combination results in less informative security prices for the underlying firms.

Keywords: Exchange traded funds (ETFs); Informed and uninformed traders; Trading costs; Informational efficiency; Pricing efficiency

JEL Classification: G11, G14, M41

Suggested Citation

Israeli, Doron and Lee, Charles M.C. and Sridharan, Suhas A., Is There a Dark Side to Exchange Traded Funds? An Information Perspective (January 13, 2017). Review of Accounting Studies, Vol. 22, Pages 1048-1083, 2017. Available at SSRN: https://ssrn.com/abstract=2625975 or http://dx.doi.org/10.2139/ssrn.2625975

Doron Israeli (Contact Author)

Interdisciplinary Center (IDC) Herzliya - Arison School of Business ( email )

P.O. Box 167
Herzliya, 46150
Israel
+972 9 952 7673 (Phone)

Charles M.C. Lee

Stanford University - Graduate School of Business ( email )

Stanford Graduate School of Business
655 Knight Way
Stanford, CA 94305-5015
United States
650-721-1295 (Phone)

Suhas A. Sridharan

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

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