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Index composition changes and the cost of incumbency

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  • Gygax, André F.
  • Otchere, Isaac

Abstract

This paper provides evidence of information effects and portfolio rebalancing effects that occur when stocks are added to or excluded from the S&P 500 index and finds that incumbents in the index realize negative excess returns when S&P revises the composition of the index. We also find that for incumbents that are in the same industry as the added firm, the price-pressure effects are mitigated by positive industry-level information and momentum effects. For index exclusions, the magnitude of the loss sustained by incumbents from the same industry as the excluded firm is larger than that realized by the non-industry incumbents, as the negative information and momentum effects reinforce the price-pressure effects. Our results suggest that changes in the composition of the index are not information-free events; however, the portfolio rebalancing effects dominate the industry information effects.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 34 (2010)
Issue (Month): 10 (October)
Pages: 2500-2509

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Handle: RePEc:eee:jbfina:v:34:y:2010:i:10:p:2500-2509

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Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords: S&P 500 index incumbent effects Portfolio rebalancing effects Industry momentum;

References

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Cited by:
  1. repec:eme:mfipps:v:36:y:2010:i:3:p:380-402 is not listed on IDEAS
  2. Gonul Colak, 2012. "IPO characteristics of index firms," Managerial Finance, Emerald Group Publishing, vol. 38(12), pages 1134-1159.

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