ETF and Corporate Reporting

Abstract

When ownership by ETFs is high, the penalty to missing earnings expectation is smaller by 43%. The smaller penalty is not due to underreaction but is attributed to the long investment horizon of ETFs. Consequently, firms with high ETF ownership engage in earnings and expectation managements less frequently and are less likely to reduce discretionary spending to marginally meet or beat. Using Russell 1000/2000 index reconstitution as an identification, we corroborate the main results. Amid conflicting evidence for the effect of ETFs on market efficiency, our finding highlights their positive effect on corporate reporting.

Keywords: ETF, Meeting or beating earnings expectation, Earnings and expectation management, Myopia