ETFs and Information Transfer Across Firms

50 Pages Posted: 20 May 2018 Last revised: 12 Dec 2018

See all articles by Sanjeev Bhojraj

Sanjeev Bhojraj

Cornell University - Samuel Curtis Johnson Graduate School of Management

Partha S. Mohanram

University of Toronto - Rotman School of Management

Suning Zhang

Iowa State University - Debbie and Jerry Ivy College of Business

Date Written: May 8, 2018

Abstract

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

Bhojraj, Sanjeev and Mohanram, Partha S. and Zhang, Suning, ETFs and Information Transfer Across Firms (May 8, 2018). 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

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
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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