Journal
REVIEW OF ACCOUNTING STUDIES
Volume 22, Issue 3, Pages 1048-1083Publisher
SPRINGER
DOI: 10.1007/s11142-017-9400-8
Keywords
Exchange traded funds (ETFs); Informed and unformed traders; Trading costs; Informational efficiency; Pricing efficiency
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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.
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