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S&P 500 index inclusion announcements: does the S&P committee tell us something new

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  • Karel Hrazdil
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    Abstract

    Purpose – The purpose of this paper is to directly examine the information hypothesis of S&P 500 index inclusion announcements by investigating the degree to which information beyond Standard & Poor's eight stated criteria enters the inclusion decision. Design/methodology/approach – Isolating a sample of S&P 500 additions and their eligible candidates during 1987-2004, this paper employs logistic analysis that identifies factors ex post beyond the stated criteria that help distinguish the type of information that influences the final selection decision and that is arguably priced at the inclusion announcements. Findings – The evidence indicates that, when choosing among new S&P 500 candidates, the S&P's committee relies primarily on publicly available information related to enterprise risk and historical performance. Material, private insight into future value-relevant information plays at most a small part in the selection. Research limitations/implications – The results suggest that index additions convey limited new information about added firms. Studies analysing index additions should start with the presumption that index inclusion announcements are information-free events, and focus on the consequences of index inclusions such as liquidity, awareness or arbitrage risk, in their relation to index premia. Originality/value – The results indicate that the previous evidence supporting the information hypothesis using the S&P 500 inclusions is not compelling.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Managerial Finance.

    Volume (Year): 36 (2010)
    Issue (Month): 5 (May)
    Pages: 368-393

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    Handle: RePEc:eme:mfipps:v:36:y:2010:i:5:p:368-393

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    Related research

    Keywords: Financial services; Indexing; Investment appraisal; Stocks;

    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. William Elliott & Bonnie Van Ness & Mark Walker & Richard Warr, 2006. "What Drives the S&P 500 Inclusion Effect? An Analytical Source," Financial Management, Financial Management Association, vol. 35(4), Winter.
    2. William B. Elliott & Bonnie F. Ness & Mark D. Walker & Richard S. Wan, 2006. "What Drives the S&P 500 Inclusion Effect? An Analytical Survey," Financial Management, Financial Management Association International, vol. 35(4), pages 31-48, December.
    3. French, Kenneth R. & Schwert, G. William & Stambaugh, Robert F., 1987. "Expected stock returns and volatility," Journal of Financial Economics, Elsevier, vol. 19(1), pages 3-29, September.
    4. Ernest N. Biktimirov & Arnold R. Cowan & Bradford D. Jordan, 2004. "Do Demand Curves for Small Stocks Slope Down?," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 27(2), pages 161-178.
    5. Bowman, Robert G, 1979. "The Theoretical Relationship between Systematic Risk and Financial (Accounting) Variables," Journal of Finance, American Finance Association, vol. 34(3), pages 617-30, June.
    6. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
    7. Diane K. Denis & John J. McConnell & Alexei V. Ovtchinnikov & Yun Yu, 2003. "S&P 500 Index Additions and Earnings Expectations," Journal of Finance, American Finance Association, vol. 58(5), pages 1821-1840, October.
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