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Archive

The Costs of ETF Membership : The Valuation Effect of ETFs on Underlying Firms

  • Kee-Hong Bae Schulich School of Business, York University, 4700 Keele Street, North York, Ontario, Canada
  • Jun-Koo Kang Division of Banking and Finance, Nanyang Business School, Nanyang Technological University, Singapore
  • Jin Wang School of Business and Economics, Wilfrid Laurier University, 75 University Avenue West, Waterloo, Ontario, Canada
In this paper, we investigate the effect of exchange traded funds (ETFs) on the value of their underlying stocks and the channels through which ETFs have an impact on firm value. We find that ETFs negatively affect firm value but also have a positive impact on underlying stocks’ systematic volatility, short interest, and liquidity. These effects of ETF on firm value and stock characteristics are more pronounced for small firms. We further find that the positive effects of ETFs on these stock characteristics are the main channels through which ETFs negatively impact firm value. Although stock liquidity is known to have a positive effect on firm value, increases in stock liquidity driven by ETFs have a negative effect on firm value because these increases facilitate short-selling activities by investors.

  • Kee-Hong Bae
  • Jun-Koo Kang
  • Jin Wang
In this paper, we investigate the effect of exchange traded funds (ETFs) on the value of their underlying stocks and the channels through which ETFs have an impact on firm value. We find that ETFs negatively affect firm value but also have a positive impact on underlying stocks’ systematic volatility, short interest, and liquidity. These effects of ETF on firm value and stock characteristics are more pronounced for small firms. We further find that the positive effects of ETFs on these stock characteristics are the main channels through which ETFs negatively impact firm value. Although stock liquidity is known to have a positive effect on firm value, increases in stock liquidity driven by ETFs have a negative effect on firm value because these increases facilitate short-selling activities by investors.