Conferences - Seminars
Innovation and informed trading: Evidence from industry ETFs
By Maureen O'HARA, Cornell University
We hypothesize that industry exchange traded funds (ETFs) encourage informed trading on underlying firms through facilitating hedging of industry-specific risks. We show that short interest on industry ETFs, reflecting part of the “long-the-stock/short-the-ETF” strategy, positively predicts returns on these ETFs and the percentage of positive earnings announcements of underlying stocks. We also show that hedge funds’ long-short strategy using industry ETFs and industry ETF membership reduces post-earnings-announcement-drift. Our results suggest that financial innovations such as industry ETFs can be beneficial for informational efficiency by helping investors hedge risks.
Accessibility Informed public