Date of Award

Summer 2021

Document Type


Degree Name

Doctor of Philosophy (PhD)




Business Administration-Finance

Committee Director

Mohammad Najand

Committee Member

Licheng Sun

Committee Member

David Selover


An exchange-traded fund (ETF) is a pooled investment vehicle with shares similar to common equities, and it can be bought or sold on the stock exchanges. As more money flow into an ETF, its assets increase as do the number of shares outstanding. The demand for ETFs, especially after the 2008 crisis, has grown remarkably in the United States. Features such as intraday tradability, tax efficiency, low fees, and transparency have contributed to the ETFs’ appeal to investors. According to Bloomberg terminal data, as of January 2021, there were 2584 U.S.-registered ETFs, with over $5.5 trillion assets under management. Recent studies have stressed the role of passive investing and its importance in the financial markets. Several lines of evidence in recent studies suggest that institutions play a role in nonfundamental demand shocks on their underlying securities (Ben‐David et al., 2018; Coval & Stafford, 2007; Etula, Rinne, Suominen, & Vaittinen, 2020; Lachance, 2020; D. Lou, 2012).

Essay 1 examines the flow-performance relation in passive Exchange-Traded Funds (ETFs) and find a robust positive relation. This evidence is inconsistent with the smart-money hypothesis. Our results, however, show a stronger positive relation for the active ETFs. We further develop a measure of flow shocks to individual stocks by aggregating daily changes in ownership of 5600 stocks held by 1200 ETFs. Using an event study at the time of flow shock, we show that the flow-driven return effect (price pressure) can fully account for the positive flow-performance relation in passive ETFs but can only partially explain this relationship in active ETFs.

Essay 2 examines the relations between dollar flows of U.S. listed ETFs with exposure to the U.S., Europe, Asia, and the rest of the world during the COVID-19 crisis utilizing a Markov Switching Model (MSVAR). We find convincing evidence that investors use ETFs to gain exposure to foreign markets. We further extend our study to ETFs listed in Europe and Asia and show investors around the world rebalance their portfolio in response to changes in the number of new COVID-19 cases in every location. While investors in Eastern Asian countries direct their money to domestic funds and reduce their foreign investment following the pandemic, European investors increase foreign investment and reduce home bias. This is consistent with the flight-to-safety effect, when investors shift their asset allocation away from riskier investments and into safer ones during the adverse economic shock.

Overall, this dissertation contributes to the finance and business literature by reconciling some of the gaps left by prior studies based on unexplored thus far key effect of passive investing and exchange-traded funds, which can have a significant effect on broad financial market.


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