Innovation and Informed Trading: Evidence from Industry ETFs

Short interest, institutional ownership, and stock returns

Shiyang Huang, Maureen O’Hara and Zhuo Zhong

The Review of Financial Studies, 2021, vol. 34, issue 3, 1280-1316

Abstract: We empirically examine the impact of industry exchange-traded funds (IETFs) on informed trading and market efficiency. We find that IETF short interest spikes simultaneously with hedge fund holdings on the member stock before positive earnings surprises, reflecting long-the-stock/short-the-ETF activity. This pattern is stronger among stocks with high industry risk exposure. A difference-in-difference analysis on the ETF inception event shows that IETFs reduce post-earnings-announcement drift more among stocks with high industry risk exposure, suggesting that IETFs improve market efficiency. We also find that the short interest ratio of IETFs positively predicts IETF returns, consistent with the hedging role of IETFs.

JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (23)

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