January 2021
Article
Management Science

ETF Activity and Informational Efficiency of Underlying Securities

By: Lawrence Glosten, Suresh Nallareddy and Yuan Zou

Format:Print

Abstract

This paper investigates the effect of exchange-traded funds’ (ETFs’) activity on the short-run informational efficiency of their underlying securities. We find that ETF activity increases short-run informational efficiency for stocks with weak information environments. The increase in informational efficiency results from the timely incorporation of systematic earnings information. In contrast, we find no such effect for stocks with stronger information environments. ETF activity increases return comovement, and this increase is partly attributable to the timely incorporation of systematic earnings information. Further, ETF activity is associated with an attenuation of postearnings-announcement drift and an increase in active share lending.

Keywords

ETF; Informational Efficiency; Co-movement; Systematic Earnings; Share Lending

Citation

Glosten, Lawrence, Suresh Nallareddy, and Yuan Zou. "ETF Activity and Informational Efficiency of Underlying Securities." Management Science 67, no. 1 (January 2021): 22–47.