IDEAS home Printed from https://ideas.repec.org/a/bla/finrev/v59y2024i2p293-323.html
   My bibliography  Save this article

ETF and corporate reporting

Author

Listed:
  • In Ji Jang
  • Namho Kang

Abstract

When ownership by ETFs is high, the penalty to missing earnings expectation is smaller by 43%. The smaller penalty is not due to underreaction but is attributed to the long investment horizon of ETFs. Consequently, firms with high ETF ownership engage in earnings and expectation managements less frequently and are less likely to reduce discretionary spending to marginally meet or beat. Using Russell 1000/2000 index reconstitution as an identification, we corroborate the main results. Amid conflicting evidence for the effect of ETFs on market efficiency, our finding highlights their positive effect on corporate reporting.

Suggested Citation

  • In Ji Jang & Namho Kang, 2024. "ETF and corporate reporting," The Financial Review, Eastern Finance Association, vol. 59(2), pages 293-323, May.
    • Handle: RePEc:bla:finrev:v:59:y:2024:i:2:p:293-323
    DOI: 10.1111/fire.12374
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/fire.12374
    Download Restriction: no
    File URL: https://libkey.io/10.1111/fire.12374?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Bergstresser, Daniel & Philippon, Thomas, 2006. "CEO incentives and earnings management," Journal of Financial Economics, Elsevier, vol. 80(3), pages 511-529, June.
    2. Bhojraj, Sanjeev & Mohanram, Partha & Zhang, Suning, 2020. "ETFs and information transfer across firms," Journal of Accounting and Economics, Elsevier, vol. 70(2).
    3. Jie (Jack) He & Tingting Liu & Jeffry Netter & Tao Shu, 2020. "Expectation Management in Mergers and Acquisitions," Management Science, INFORMS, vol. 66(3), pages 1205-1226, March.
    4. Bartov, Eli & Givoly, Dan & Hayn, Carla, 2002. "The rewards to meeting or beating earnings expectations," Journal of Accounting and Economics, Elsevier, vol. 33(2), pages 173-204, June.
    5. Andrew Bird & Stephen A. Karolyi, 2016. "Do Institutional Investors Demand Public Disclosure?," The Review of Financial Studies, Society for Financial Studies, vol. 29(12), pages 3245-3277.
    6. Alex Edmans, 2009. "Blockholder Trading, Market Efficiency, and Managerial Myopia," Journal of Finance, American Finance Association, vol. 64(6), pages 2481-2513, December.
    7. Yen-Cheng Chang & Harrison Hong & Inessa Liskovich, 2015. "Regression Discontinuity and the Price Effects of Stock Market Indexing," The Review of Financial Studies, Society for Financial Studies, vol. 28(1), pages 212-246.
    8. repec:oup:revfin:v:29:y:2016:i:12:p:3245-3277. is not listed on IDEAS
    9. Jennifer Huang & Clemens Sialm & Hanjiang Zhang, 2011. "Risk Shifting and Mutual Fund Performance," The Review of Financial Studies, Society for Financial Studies, vol. 24(8), pages 2575-2616.
    10. Ian R Appel & Todd A Gormley & Donald B Keim, 2019. "Standing on the Shoulders of Giants: The Effect of Passive Investors on Activism," The Review of Financial Studies, Society for Financial Studies, vol. 32(7), pages 2720-2774.
    11. Alan D. Crane & Sébastien Michenaud & James P. Weston, 2016. "Editor's Choice The Effect of Institutional Ownership on Payout Policy: Evidence from Index Thresholds," The Review of Financial Studies, Society for Financial Studies, vol. 29(6), pages 1377-1408.
    12. Jones, Jj, 1991. "Earnings Management During Import Relief Investigations," Journal of Accounting Research, Wiley Blackwell, vol. 29(2), pages 193-228.
    13. Ron Kasznik & Maureen F. McNichols, 2002. "Does Meeting Earnings Expectations Matter? Evidence from Analyst Forecast Revisions and Share Prices," Journal of Accounting Research, Wiley Blackwell, vol. 40(3), pages 727-759, June.
    14. Skinner, Douglas J., 1997. "Earnings disclosures and stockholder lawsuits," Journal of Accounting and Economics, Elsevier, vol. 23(3), pages 249-282, November.
    15. Kothari, S.P. & Leone, Andrew J. & Wasley, Charles E., 2005. "Performance matched discretionary accrual measures," Journal of Accounting and Economics, Elsevier, vol. 39(1), pages 163-197, February.
    16. Kross, William J. & Ro, Byung T. & Suk, Inho, 2011. "Consistency in meeting or beating earnings expectations and management earnings forecasts," Journal of Accounting and Economics, Elsevier, vol. 51(1), pages 37-57.
    17. Doron Israeli & Charles M. C. Lee & Suhas A. Sridharan, 2017. "Is there a dark side to exchange traded funds? An information perspective," Review of Accounting Studies, Springer, vol. 22(3), pages 1048-1083, September.
    18. SANJEEV BHOJRAJ & PAUL HRIBAR & MARC PICCONI & JOHN McINNIS, 2009. "Making Sense of Cents: An Examination of Firms That Marginally Miss or Beat Analyst Forecasts," Journal of Finance, American Finance Association, vol. 64(5), pages 2361-2388, October.
    19. Klein, April, 2002. "Audit committee, board of director characteristics, and earnings management," Journal of Accounting and Economics, Elsevier, vol. 33(3), pages 375-400, August.
    20. David F. Larcker & Scott A. Richardson, 2004. "Fees Paid to Audit Firms, Accrual Choices, and Corporate Governance," Journal of Accounting Research, Wiley Blackwell, vol. 42(3), pages 625-658, June.
    21. Kross, William J. & Ro, Byung T. & Suk, Inho, 2011. "Consistency in meeting or beating earnings expectations and management earnings forecasts," Journal of Accounting and Economics, Elsevier, vol. 51(1-2), pages 37-57, February.
    22. Brian J. Bushee, 2001. "Do Institutional Investors Prefer Near†Term Earnings over Long†Run Value?," Contemporary Accounting Research, John Wiley & Sons, vol. 18(2), pages 207-246, June.
    23. Itzhak Ben‐David & Francesco Franzoni & Rabih Moussawi, 2018. "Do ETFs Increase Volatility?," Journal of Finance, American Finance Association, vol. 73(6), pages 2471-2535, December.
    24. Zhi Da & Sophie Shive, 2018. "Exchange traded funds and asset return correlations," European Financial Management, European Financial Management Association, vol. 24(1), pages 136-168, January.
    25. Lawrence Glosten & Suresh Nallareddy & Yuan Zou, 2021. "ETF Activity and Informational Efficiency of Underlying Securities," Management Science, INFORMS, vol. 67(1), pages 22-47, January.
    26. Schmidt, Cornelius & Fahlenbrach, Rüdiger, 2017. "Do exogenous changes in passive institutional ownership affect corporate governance and firm value?," Journal of Financial Economics, Elsevier, vol. 124(2), pages 285-306.
    27. Shiyang Huang & Maureen O’Hara & Zhuo Zhong, 2021. "Innovation and Informed Trading: Evidence from Industry ETFs [Short interest, institutional ownership, and stock returns]," The Review of Financial Studies, Society for Financial Studies, vol. 34(3), pages 1280-1316.
    28. Roychowdhury, Sugata, 2006. "Earnings management through real activities manipulation," Journal of Accounting and Economics, Elsevier, vol. 42(3), pages 335-370, December.
    29. Appel, Ian R. & Gormley, Todd A. & Keim, Donald B., 2016. "Passive investors, not passive owners," Journal of Financial Economics, Elsevier, vol. 121(1), pages 111-141.
    30. Edith S. Hotchkiss & Deon Strickland, 2003. "Does Shareholder Composition Matter? Evidence from the Market Reaction to Corporate Earnings Announcements," Journal of Finance, American Finance Association, vol. 58(4), pages 1469-1498, August.
    31. Rachelle C. Sampson & Yuan Shi, 2023. "Are U.S. firms becoming more short‐term oriented? Evidence of shifting firm time horizons from implied discount rates, 1980–2013," Strategic Management Journal, Wiley Blackwell, vol. 44(1), pages 231-263, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
    2. Alexandre Garel & Jose Martin-Flores & Arthur Petit-Romec & Ayesha Scott, 2021. "Institutional investor distraction and earnings management," Post-Print hal-03096196, HAL.
    3. Chen, Yangyang & Rhee, S. Ghon & Veeraraghavan, Madhu & Zolotoy, Leon, 2015. "Stock liquidity and managerial short-termism," Journal of Banking & Finance, Elsevier, vol. 60(C), pages 44-59.
    4. Jun Wang & Qijian Wang, 2021. "Influence or Preference? A New Look at Institutional Ownership and Earnings Management," Businesses, MDPI, vol. 1(3), pages 1-17, October.
    5. Chang, Chu-Hsuan & Lin, Hsiou-Wei William, 2018. "Does there prevail momentum in earnings management for seasoned equity offering firms?," International Review of Economics & Finance, Elsevier, vol. 55(C), pages 111-129.
    6. Garel, Alexandre & Martin-Flores, Jose M. & Petit-Romec, Arthur & Scott, Ayesha, 2021. "Institutional investor distraction and earnings management," Journal of Corporate Finance, Elsevier, vol. 66(C).
    7. Ng, Jeffrey & Wu, Hong & Zhai, Weihuan & Zhao, Jing, 2021. "The effect of shareholder activism on earnings management: Evidence from shareholder proposals11We appreciate the helpful comments and suggestions from Stephen Taylor, Gary Biddle, Santosh Ramalingego," Journal of Corporate Finance, Elsevier, vol. 69(C).
    8. Cline, Brandon N. & Fu, Xudong & Tang, Tian, 2020. "Shareholder investment horizons and bank debt financing," Journal of Banking & Finance, Elsevier, vol. 110(C).
    9. Wenxia Ge & Jeong-Bon Kim, 2014. "Boards, takeover protection, and real earnings management," Review of Quantitative Finance and Accounting, Springer, vol. 43(4), pages 651-682, November.
    10. Dasgupta, Amil & Fos, Vyacheslav & Sautner, Zacharias, 2021. "Institutional investors and corporate governance," LSE Research Online Documents on Economics 112114, London School of Economics and Political Science, LSE Library.
    11. Itzhak Ben-David & Francesco A. Franzoni & Rabih Moussawi, 2019. "An Improved Method to Predict Assignment of Stocks into Russell Indexes," Swiss Finance Institute Research Paper Series 19-56, Swiss Finance Institute.
    12. Jiang, Fuxiu & Ma, Yunbiao & Wang, Xue, 2020. "Multiple blockholders and earnings management," Journal of Corporate Finance, Elsevier, vol. 64(C).
    13. Chen, Jing & Jung, Michael J. & Tang, Michael, 2023. "Does lowball guidance work? An analysis of firms that consistently beat their guidance by large margins," The British Accounting Review, Elsevier, vol. 55(6).
    14. Huang, Wei & Goodell, John W. & Zhang, Hong, 2019. "Pre-merger management in developing markets: The role of earnings glamor," International Review of Financial Analysis, Elsevier, vol. 65(C).
    15. Yangyang Chen & C. S. Agnes Cheng & Shuo Li & Jingran Zhao, 2021. "The monitoring role of the media: Evidence from earnings management," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(3-4), pages 533-563, March.
    16. Xia, Jingjing, 2023. "Redrawing the line: Narrowly beating analyst forecasts and journalists’ co-coverage choices in earnings-related news articles," Journal of Contemporary Accounting and Economics, Elsevier, vol. 19(3).
    17. Bird, Andrew & Karolyi, Stephen A. & Ruchti, Thomas G., 2019. "Understanding the “numbers game”," Journal of Accounting and Economics, Elsevier, vol. 68(2).
    18. Griffin, Paul A. & Hong, Hyun A. & Liu, Yun & Ryou, Ji Woo, 2021. "The dark side of CEO social capital: Evidence from real earnings management and future operating performance," Journal of Corporate Finance, Elsevier, vol. 68(C).
    19. Wang, Xiaoqiong & Wei, Siqi, 2021. "Does the investment horizon of institutional investors matter for stock liquidity?," International Review of Financial Analysis, Elsevier, vol. 74(C).
    20. Daniel Schmidt & Bastian von Beschwitz, 2022. "Passive Ownership and Short Selling," International Finance Discussion Papers 1365, Board of Governors of the Federal Reserve System (U.S.).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:finrev:v:59:y:2024:i:2:p:293-323. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/efaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.