ETFs and Information Transfer Across Firms
54 Pages Posted: 20 May 2018 Last revised: 23 Jul 2020
Date Written: July 22, 2020
Abstract
This paper examines the role that exchange-traded funds (ETFs) play in the transfer of
information across firms around earnings announcements. Our analysis focuses on the differences
in information transfer between broad-based and sector ETFs. We find that firms with sector ETF
ownership are associated with reduced over-extrapolation of intra-industry information, increased
earnings response coefficients (ERCs), greater responsiveness to the industry and idiosyncratic
components of earnings surprise, and reduced post-earnings announcement drift. Conversely,
broad-based ETFs are associated with decreased ERCs and lower responsiveness to industry and
idiosyncratic information. Follower firms in sector ETFs show stronger reactions and weaker
reversals when leader firms in the same ETFs release earnings, while follower firms in broad
based ETFs show weaker reactions and greater reversals. Overall, sector ETFs have improved
informational efficiency by facilitating information transfer, while broad ETFs might have
worsened informational efficiency in the context of earnings announcements.
Keywords: ETFs, Information Transfer, Post-Earnings Announcement Drift, Sector ETFs
JEL Classification: G12, G14, M41, D53
Suggested Citation: Suggested Citation