ETF Activity and Informational Efficiency of Underlying Securities

60 Pages Posted: 2 Oct 2016 Last revised: 4 Sep 2019

See all articles by Lawrence R. Glosten

Lawrence R. Glosten

Columbia Business School - Finance and Economics

Suresh Nallareddy

Duke University - Fuqua School of Business

Yuan Zou

Harvard University - Business School (HBS)

Date Written: December 1, 2016

Abstract

This paper investigates the effect of exchange-traded funds’ (ETF) activity on the short-run informational efficiency of their underlying securities. We find that ETF activity increases short-run informational efficiency for stocks with weak information environments. 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. ETF activity increases return co-movement, and this increase is partly attributable to the timely incorporation of systematic earnings information. Further, ETF activity is associated with an attenuation of post-earnings-announcement drift and an increase in active share lending.

Keywords: ETF, Information Efficiency

JEL Classification: G00, G12, G14, M41

Suggested Citation

Glosten, Lawrence R. and Nallareddy, Suresh and Zou, Yuan, ETF Activity and Informational Efficiency of Underlying Securities (December 1, 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

Lawrence R. Glosten

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Suresh Nallareddy (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

Yuan Zou

Harvard University - Business School (HBS)

Soldiers Field Road
Morgan 362
Boston, MA 02163
United States

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