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Review of Financial Studies Vol. 34 No. 3 2021

Innovation and Informed Trading: Evidence from Industry ETFs

Shiyang Huang1; Maureen O’Hara2; Zhuo Zhong3

1 Faculty of Business and Economics, The University of Hong Kong , · 2 Johnson College of Business, Cornell University · 3 Department of Finance, University of Melbourne

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.

DOI
10.1093/rfs/hhaa077
Volume
34
Issue
3
Pages
1280-1316
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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