Earnings Announcements and the Rise of Passive Ownership
71 Pages Posted: 27 Nov 2018 Last revised: 19 Feb 2020
Date Written: February 19, 2020
This paper proposes a way to measure the effect of rising passive ownership on stock price informativeness that does not rely on any particular model. I examine patterns in trading volume, returns and volatility around days we know information is released: earnings announcements. Between 1990 and 2018, pre-earnings abnormal trading volume and the pre-earnings drift declined, while the share of annual volatility on earnings days increased. At the firm-level, there is a negative relationship between passive ownership and pre-earnings price informativeness. This result is robust to using only quasi-exogenous increases in passive ownership associated with S&P 500 additions and Russell 1000/2000 rebalancing. I link increases in passive ownership to decreases in information gathering: increases in passive ownership are correlated with fewer analysts covering a stock, fewer downloads of SEC filings, and a larger response to earnings news.
Keywords: Passive Ownership, ETFs, Market Efficiency
JEL Classification: G12, G14
Suggested Citation: Suggested Citation