ETFs and Information Transfer Across Firms

54 Pages Posted: 20 May 2018 Last revised: 23 Jul 2020

See all articles by Sanjeev Bhojraj

Sanjeev Bhojraj

Cornell University - Samuel Curtis Johnson Graduate School of Management

Partha S. Mohanram

Rotman School of Management, University of Toronto

Suning Zhang

Iowa State University - Debbie and Jerry Ivy College of Business

Date Written: July 22, 2020

Abstract

This paper examines the role that exchange-traded funds (ETFs) play in the transfer of
information across firms around earnings announcements. Our analysis focuses on the differences
in information transfer between broad-based and sector ETFs. We find that firms with sector ETF
ownership are associated with reduced over-extrapolation of intra-industry information, increased
earnings response coefficients (ERCs), greater responsiveness to the industry and idiosyncratic
components of earnings surprise, and reduced post-earnings announcement drift. Conversely,
broad-based ETFs are associated with decreased ERCs and lower responsiveness to industry and
idiosyncratic information. Follower firms in sector ETFs show stronger reactions and weaker
reversals when leader firms in the same ETFs release earnings, while follower firms in broad
based ETFs show weaker reactions and greater reversals. Overall, sector ETFs have improved
informational efficiency by facilitating information transfer, while broad ETFs might have
worsened informational efficiency in the context of earnings announcements.

Keywords: ETFs, Information Transfer, Post-Earnings Announcement Drift, Sector ETFs

JEL Classification: G12, G14, M41, D53

Suggested Citation

Bhojraj, Sanjeev and Mohanram, Partha S. and Zhang, Suning, ETFs and Information Transfer Across Firms (July 22, 2020). Journal of Accounting & Economics (JAE), Forthcoming, Rotman School of Management Working Paper No. 3175382, Available at SSRN: https://ssrn.com/abstract=3175382 or http://dx.doi.org/10.2139/ssrn.3175382

Sanjeev Bhojraj (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Department of Accounting
Ithaca, NY 14853
United States
607-255-4069 (Phone)
607-254-4590 (Fax)

Partha S. Mohanram

Rotman School of Management, University of Toronto ( email )

Canada

Suning Zhang

Iowa State University - Debbie and Jerry Ivy College of Business ( email )

613 Wallace Road
Ames, IA 50011-2063
United States

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