Is there a dark side to exchange traded funds? An information perspective

Doron Israeli (), Charles Lee and Suhas A. Sridharan ()
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Doron Israeli: Arison School of Business, The Interdisciplinary Center (IDC) Herzliya
Suhas A. Sridharan: Emory University

Review of Accounting Studies, 2017, vol. 22, issue 3, No 2, 1048-1083

Abstract: Abstract We examine whether an increase in ETF ownership is accompanied by a decline in pricing efficiency for the underlying component securities. Our tests show an increase in ETF ownership is associated with (1) higher trading costs (bid-ask spreads and market liquidity), (2) an increase in “stock return synchronicity,” (3) a decline in “future earnings response coefficients,” and (4) a decline in the number of analysts covering the firm. Collectively, our findings support the view that increased ETF ownership can lead to higher trading costs and lower benefits from information acquisition. This combination results in less informative security prices for the underlying firms.

Keywords: Exchange traded funds (ETFs); Informed and unformed traders; Trading costs; Informational efficiency; Pricing efficiency; G11; G14; M41 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (64)

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DOI: 10.1007/s11142-017-9400-8

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