59 Pages Posted: 2 Oct 2016 Last revised: 5 Jan 2017
Date Written: December 2016
This paper investigates the effect of exchange-traded funds’ (ETF) activity on the informational efficiency of their underlying securities. We find that ETF activity increases informational efficiency for stocks with weak information environments and for stocks with imperfectly competitive equity markets. The increase in informational efficiency results from the timely incorporation of systematic earnings information. In contrast, we find no such effect for stocks with stronger information environments and stocks with perfectly competitive equity markets. ETF activity increases return co-movement, and this increase is partly attributable to the timely incorporation of systematic earnings information. Using S&P 500 index additions and deletions as an additional setting and Russell 1000/2000 index reconstitution as an identification, we corroborate our main findings.
Keywords: ETF, Information Efficiency
JEL Classification: G00, G12, G14, M41
Suggested Citation: Suggested Citation
Glosten, Lawrence R. and Nallareddy, Suresh and Zou, Yuan, ETF Activity and Informational Efficiency of Underlying Securities (December 2016). Columbia Business School Research Paper No. 16-71. Available at SSRN: https://ssrn.com/abstract=2846157 or http://dx.doi.org/10.2139/ssrn.2846157