Abstract: Based on the data of the constituent stocks of the index funds (i.e. ETF) in China’s A-share market from 2011 to 2019, this paper takes the degree of noise trader participation and the delaying degree of stock prices responding information as a proxy for pricing efficiency and employs the panel fixed effect model to study the impact of ETF holding on stock pricing efficiency and to conduct a mechanism analysis. The findings show that: firstly, the higher the proportion of the shares held by the ETF, the more accurate and timely the stock price responding information will be, that is, the higher the pricing efficiency. Secondly, ETF holdings mainly affect the efficiency of stock pricing through the three mechanisms: transaction costs, short-sale constraints, and information mining; the higher the proportion of ETF holdings, the more helpful it is to reduce transaction costs and short-sale constraints, and to attract more analysts to mine information. Thirdly, the proportion of ETF holding is mainly affected by fund purchase and redemption and the component stock rebalancing; the increase in the ETF holding related to fund purchase and redemption can improve the speed and accuracy of stock price reflection information, while the increase in the ETF holding related to the component stock rebalancing can only improve the speed of stock prices reflecting information. Therefore, it is recommended that the relevant departments should enrich the types of ETF products, guide institutional investors to participate in ETF transactions, promote the development of ETF options, improve the ETF short-sale mechanism and regulatory system, and standardize the operation of the ETF markets.

Key words: ETF holding, pricing efficiency, transaction costs, short sale constraints, information mining