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Innovation and Informed Trading: Evidence from Industry ETFs
[Short interest, institutional ownership, and stock returns]

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  • Shiyang Huang
  • Maureen O’Hara
  • Zhuo Zhong

Abstract

We empirically examine the impact of industry exchange-traded funds (IETFs) on informed trading and market efficiency. We find that IETF short interest spikes simultaneously with hedge fund holdings on the member stock before positive earnings surprises, reflecting long-the-stock/short-the-ETF activity. This pattern is stronger among stocks with high industry risk exposure. A difference-in-difference analysis on the ETF inception event shows that IETFs reduce post-earnings-announcement drift more among stocks with high industry risk exposure, suggesting that IETFs improve market efficiency. We also find that the short interest ratio of IETFs positively predicts IETF returns, consistent with the hedging role of IETFs.

Suggested Citation

  • Shiyang Huang & Maureen O’Hara & Zhuo Zhong, 2021. "Innovation and Informed Trading: Evidence from Industry ETFs [Short interest, institutional ownership, and stock returns]," The Review of Financial Studies, Society for Financial Studies, vol. 34(3), pages 1280-1316.
    • Handle: RePEc:oup:rfinst:v:34:y:2021:i:3:p:1280-1316.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaa077
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    References listed on IDEAS

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    6. Duffy, John & Friedman, Dan & Rabanal, Jean Paul & Rud, Olga, 2022. "The impact of ETF index inclusion on stock prices," UiS Working Papers in Economics and Finance 2022/2, University of Stavanger.
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    8. Li, Li & Huang, Shiyang & Lou, Dong & Shi, Jiahong, 2021. "Why don't most mutual funds short sell?," LSE Research Online Documents on Economics 118854, London School of Economics and Political Science, LSE Library.
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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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