The changing nature of financial analysis in the presence of ETFs

Russell Lundholm () and Xin Zheng
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Russell Lundholm: University of British Columbia
Xin Zheng: University of British Columbia

Review of Accounting Studies, 2025, vol. 30, issue 1, No 22, 860-898

Abstract: Abstract We study how the launch of an electronically traded fund (ETF) that holds firms in a specific industry changes the behavior of analysts who follow that firms in that industry. An industry ETF allows investors to trade the firm-specific payoff separately from the industry payoff. This causes significant changes in the value of different types of information. In particular, following an increase in a firm’s industry ETF coverage, the firm’s analyst coverage increases in the following year, and this holds after controlling for changes in institutional investment and other characteristics. We also find that, following an increase in ETF coverage, analyst recommendations are more likely to include an industry recommendation separate from the firm-specific recommendation, and the latter is more likely to be stated in relative terms. Our results strengthen when the new ETF is a better hedge against the industry payoff factor and when we introduce a plausible control for endogeneity.

Keywords: Financial statement analysis; Analyst recommendations; Analyst coverage; Electronically traded funds (search for similar items in EconPapers)
JEL-codes: G1 G14 G41 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s11142-024-09841-9

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