The real effects of exchange traded funds

• Main Authors: LI, Frank Weikai, LIU, Xuewen, SUN, Chengzhu
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2018
• Subjects: ETFs; Real Efficiency; Informational Efficiency; Managerial Learning; Finance; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/5949; https://ink.library.smu.edu.sg/context/lkcsb_research/article/6948/viewcontent/SSRN_id3129369.pdf
• Institution: Singapore Management University

This paper investigates the effects of exchange-traded funds (ETFs) on the real efficiency of the underlying securities. We document strong evidence that being held by ETFs increases the sensitivity of a firm's investment to its own stock price. This is consistent with the model prediction on the managerial learning channel. Higher ownership by ETFs increases the firm's stock price informativeness about systematic shocks but may decrease the informativeness about firm-specific shocks; however, the firm manager cares most and wants to learn from the stock price mainly about systematic shocks in making investment decisions as he already has precise private information about firm-specific shocks. Consistent with the learning channel, we further find that a firm's investment becomes less responsive to its peers' stock prices and its operating performance improves after its ownership by ETFs increases. Overall, our study suggests the positive effect of ETFs on real efficiency, even though their net effect on the market efficiency of the underlyings is likely ambiguous.