We examine the stock market effect of changes in the composition of the Dow Jones Industrial Average (DJIA). Unlike S P 500 listing studies, we find that the price and the trading volume of newly listed DJIA firms are unaffected. We attribute this result to a lack of index fund rebalancing, since index trading is limited for most of our sample period and index funds mimic the S P 500, not the DJIA. Firms removed from the index, however, experience significant price declines. We consider information signaling, price pressure, imperfect substitutes, and information cost/liquidity explanations for these asymmetric findings. The evidence is consistent with the information cost/liquidity explanation, which holds that investors demand a premium for higher trading costs and for holding securities that have relatively less available information.
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Volume (Year): 30 (1995) Issue (Month): 01 (March) Pages: 135-157 Download reference. The following formats are available: HTML
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