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Do ETFs Improve the pricing efficiency of the A-share market—examining ETF holdings of individual stocks

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  • Xiaokang Zhao
  • Guanghe Ran
  • Bing Shen
  • Xiaolong Li

Abstract

Given the efficiency loss regarding the Chinese capital market, it is necessary to examine ways to improve pricing efficiency. Thus, this study considers A-share market listed companies (2005–2019) and adopts the proxy variable of pricing efficiency from the price adjustment speed to examine the effect of exchange traded funds (ETFs) holding shares on stock pricing efficiency. It also examines the effect of ETFs’ entry and exit regarding the underlying stocks on the stock pricing efficiency relative to traditional mutual funds. Accordingly, the pricing efficiency of ETF-holding stocks is significantly higher than that of stocks not held by ETFs. Pricing efficiency is significantly improved after ETFs enter the underlying stocks. Contrarily, there is a significant decline in pricing efficiency when ETFs exit the underlying stocks. Moreover, whereas ETFs can help improve the pricing efficiency of the Chinese stock market, traditional mutual funds have somewhat harmed market pricing efficiency. Further, mediating effect model tests showed that ETF improves the stock pricing efficiency mainly via a trading rather than a governance channel. Thus, this study provides a new theoretical basis for improving the pricing efficiency of China’s capital market.

Suggested Citation

  • Xiaokang Zhao & Guanghe Ran & Bing Shen & Xiaolong Li, 2021. "Do ETFs Improve the pricing efficiency of the A-share market—examining ETF holdings of individual stocks," Applied Economics, Taylor & Francis Journals, vol. 53(35), pages 4134-4147, July.
    • Handle: RePEc:taf:applec:v:53:y:2021:i:35:p:4134-4147
    DOI: 10.1080/00036846.2021.1897075
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    Cited by:

    1. Priya Malhotra & Pankaj Sinha, 2023. "Exchange-traded Funds in India Amid COVID-19 Crisis: An Empirical Analysis of the Performance," Metamorphosis: A Journal of Management Research, , vol. 22(1), pages 38-54, June.

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