ETFs and Information Transfer Across Firms
50 Pages Posted: 20 May 2018 Last revised: 12 Dec 2018
Date Written: May 8, 2018
This paper examines the role that exchange-traded funds (ETFs) play in the transfer and dissemination of information across firms, using earnings announcements as a source of information. We find that the anomalous over-extrapolation of intra-industry information documented in prior research weakens with ETF ownership of firms and becomes insignificant with sector ETF ownership. At the ETF level, we find that sector ETFs have improved information transfer around earnings announcements, with greater followers’ reaction to the leaders’ announcements and lower subsequent reversals. In contrast, non-sector ETFs appear to drive the reversal effect observed in the overall sample. We also provide evidence that the previously documented reduction in ERCs for firms with high ETF ownership is attributable to more efficient information transfer rather than investor inattention. Finally, we show that ETF ownership at the firm level is associated with lower levels of post-earnings announcement drift, but only when the ETF ownership is sector based. In general, we find that sector ETFs are effective at transmitting factor (industry) information impounded in earnings news but general broad market ETFs are not very useful (and potentially detrimental). Our results highlighting the role of sector ETFs help reconcile conflicting results in the prior research as to whether ETFs foster greater market efficiency.
Keywords: ETFs, Information Transfer, Post-Earnings Announcement Drift, Sector ETFs
JEL Classification: G12, G14, M41, D53
Suggested Citation: Suggested Citation