ETF Ownership and Corporate Investment
57 Pages Posted: 11 Jun 2018 Last revised: 8 Nov 2018
Date Written: November 6, 2018
Abstract
We examine whether ownership by exchange traded funds (ETFs) affects the relation between real investment and Tobin’s Q. Recent studies show that the stock prices of companies included in ETF baskets are more noisy; due to this effect, the managers of firms highly-owned by ETFs should rely less stock prices for information, which, in turn, should weaken the investment-Q relation for such firms. The results reliably confirm the hypothesis. To address endogeneity, we estimate an instrumental variable model based on S&P500 index additions, and find that the results continue to hold. The sensitivity of dividends to prices is higher for firms that are heavily ETF-owned, which suggests that managers pay money out to shareholders foregoing growth opportunities. Operating performance is less sensitive to stock prices for higher ETF-owned firms, which suggests that the effect of ETF ownership on the sensitivity of corporate policies to stock prices is to make the link between stock price and future performance more tenuous..
Keywords: ETF Ownership, Corporate Investment
JEL Classification: G10, G30
Suggested Citation: Suggested Citation
Institute of Global Finance, UNSW Business School
Sydney, NSW 2052
Australia
Financial Research Network (FIRN)
C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia
