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Is there a dark side to exchange traded funds? An information perspective

Author

Listed:
  • Doron Israeli

    (Arison School of Business, The Interdisciplinary Center (IDC) Herzliya)

  • Charles M. C. Lee

    (Stanford University)

  • Suhas A. Sridharan

    (Emory University)

Abstract

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.

Suggested Citation

  • Doron Israeli & Charles M. C. Lee & Suhas A. Sridharan, 2017. "Is there a dark side to exchange traded funds? An information perspective," Review of Accounting Studies, Springer, vol. 22(3), pages 1048-1083, September.
    • Handle: RePEc:spr:reaccs:v:22:y:2017:i:3:d:10.1007_s11142-017-9400-8
    DOI: 10.1007/s11142-017-9400-8
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