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The changing nature of financial analysis in the presence of ETFs

Author

Listed:
  • Russell Lundholm

    (University of British Columbia)

  • Xin Zheng

    (University of British Columbia)

Abstract

We study how the launch of an electronically traded fund (ETF) that holds firms in a specific industry changes the behavior of analysts who follow that firms in that industry. An industry ETF allows investors to trade the firm-specific payoff separately from the industry payoff. This causes significant changes in the value of different types of information. In particular, following an increase in a firm’s industry ETF coverage, the firm’s analyst coverage increases in the following year, and this holds after controlling for changes in institutional investment and other characteristics. We also find that, following an increase in ETF coverage, analyst recommendations are more likely to include an industry recommendation separate from the firm-specific recommendation, and the latter is more likely to be stated in relative terms. Our results strengthen when the new ETF is a better hedge against the industry payoff factor and when we introduce a plausible control for endogeneity.

Suggested Citation

  • Russell Lundholm & Xin Zheng, 2025. "The changing nature of financial analysis in the presence of ETFs," Review of Accounting Studies, Springer, vol. 30(1), pages 860-898, March.
    • Handle: RePEc:spr:reaccs:v:30:y:2025:i:1:d:10.1007_s11142-024-09841-9
    DOI: 10.1007/s11142-024-09841-9
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Financial statement analysis; Analyst recommendations; Analyst coverage; Electronically traded funds;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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