ETF Ownership and Informational Efficiency of Underlying Stocks : Evidence from China

This study investigates how exchange-traded fund (ETF) activity affects the informational efficiency of its underlying stocks in the Chinese market which has several different features from developed markets. We show that increased ETF ownership improves stock liquidity and attracts informed investors, resulting in higher pricing efficiency. By exploiting the unique setting of Chinese market, we show that the informational role of ETFs depends on whether they can be used for intraday trading. This result not only mitigates the potential endogeneity problem but verifies our underlying channels. Our study adds to the ongoing debate on the economic consequences of financial innovations