Finance seminar - Associate Professor Zhuo Zhong - University of Melbourne

A seminar by Associate Professor Zhuo Zhong from University of Melbourne

Title: Passive investor s, active moves: ETF participation in IPOs

Abstract: We examine the pervasive participation of index ETFs in IPOs in the Chinese stock market,
where ETFs exploit underpricing to generate returns of approximately 4.56% per annum.
However, this discretionary activity also increases non-fundamental volatility and short-term
return reversals among constituent stocks, constituting a pecuniary externality. Exploiting a
policy shock as a quasi-natural experiment, we construct an instrumental variable to establish
causality for both the private benefits and market-wide costs. Our findings highlight the dual
nature of index ETF activeness: discretionary strategies can enhance investor returns while
imposing costs on the broader market.

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