55 Pages Posted: 3 Jul 2015 Last revised: 30 Mar 2017
Date Written: November 28, 2016
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: Suggested Citation
Israeli, Doron and Lee, Charles M.C. and Sridharan, Suhas A., Is There a Dark Side to Exchange Traded Funds (ETFs)? An Information Perspective (November 28, 2016). Review of Accounting Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2625975 or http://dx.doi.org/10.2139/ssrn.2625975
By Meb Faber