ETFs and Information Transfer Across Firms

This paper examines the role that exchange-traded funds (ETFs) play in the transfer of<br>information across firms around earnings announcements. Our analysis focuses on the differences<br>in information transfer between broad-based and sector ETFs. We find that firms with sector ETF<br>ownership are associated with reduced over-extrapolation of intra-industry information, increased<br>earnings response coefficients (ERCs), greater responsiveness to the industry and idiosyncratic<br>components of earnings surprise, and reduced post-earnings announcement drift. Conversely,<br>broad-based ETFs are associated with decreased ERCs and lower responsiveness to industry and<br>idiosyncratic information. Follower firms in sector ETFs show stronger reactions and weaker<br>reversals when leader firms in the same ETFs release earnings, while follower firms in broad<br>based ETFs show weaker reactions and greater reversals. Overall, sector ETFs have improved<br>informational efficiency by facilitating information transfer, while broad ETFs might have<br>worsened informational efficiency in the context of earnings announcements.