Exchange-Traded Funds and Real Investment

Abstract

We investigate the link between exchange-traded funds and real investment. Cross-sectionally, higher ETF ownership is associated with an increased sensitivity of real investment to Tobin’s q, and a heightened ability of stock returns to forecast future earnings. Inclusion of stocks in industry ETFs enhances investment-q sensitivity, and implies greater incorporation of earnings information into prices prior to public releases. Greater non-market ETF ownership leads to increased (reduced) reliance of real investment on own (peers’) stock prices. Overall, the evidence is consistent with ETFs exerting a positive effect on real investment efficiency via greater flows of information.

Keywords: ETFs, Real Efficiency, Informational Efficiency, Managerial Learning

JEL Classification: G14, G23, G31