Influence of Exchange Traded Fund (ETF) Splits on Investor Behavior
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Date
2018-05
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The Ohio State University
Abstract
Investors do not always behave rationally. Nominal share prices have been found to influence investor behavior and expectations about the future. One way to measure the impact of nominal share prices on investor behavior is through stock splits, as when they occur, underlying fundamentals do not change, only share price changes. Studies show mixed results on the impact of stock splits on liquidity, as measured by daily trading volumes. Additionally, research shows exchange traded funds (ETFs) have high tracking efficiency, as measured by deviation from net asset value (NAV). To expand on current research and determine the impact of splits and reverse splits on the liquidity of ETFs, this paper measures how trading volumes of ETFs change following splits and reverse splits for the years 2010-2016. Further, this paper measures how deviations from NAV and tracking efficiency of ETFs change following splits and reverse splits. The results suggest that following splits, trading volumes of ETFs on average tend to increase, but not at a statistically significant level. Following reverse splits, trading volumes of ETFs on average increase dramatically at a statistically significant level. Deviations from NAV and tracking efficiency of ETFs do not change significantly following either a split or reverse split. Despite an increase in liquidity post-split, the deviations from NAV largely fluctuate randomly, potentially implying the ETFs were priced efficiently prior to the split. However, there is some evidence of increased mispricing in the days surrounding a split, potentially suggesting irrational investor behavior. Based on these results, it is possible that nominal share prices influence investor behavior regarding ETFs. The cause, however, remains unknown. This paper provides insight into investor behavior that may be valuable not only to investors, but also to the companies that manage ETFs.
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Keywords
exchange traded funds, behavioral finance, stock split, nominal price influence, investor behavior