Consequently, the researchers found that the stock’s price might send the wrong messages if the stocks are crowded out by passive ETFs, like a watchdog that barks at the wrong things, Professor Subrahmanyam said.
“ETF ownership adversely impacts the relationship between [stock]prices and corporate policies,” such as capital allocation. “Since the stock prices of firms highly owned by ETFs are less informative, managers will rely less on them when making real investment decisions,” the study says.
Due to the rising popularity of ETFs and the increased assets flowing into the upstart fund investment vehicle, stock pickers may find it harder to accurately price company stocks based on company fundamentals. Meanwhile, the overwhelming demand for broad index-based fund strategies may contribute to the increased lockstep nature of the equity market.
For more information on ETFs, visit our ETF 101 category.