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A Change Of Focus Stock Market Reclassification In The Uk

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  • Bryan Mase

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    Abstract

    This paper examines the impact of a change of focus by a firm, as signified by stock market reclassification. It distinguishes between sector reclassifications that are motivated by information specific to a particular firm, and those that result from sector redefinitions and reorganisations. The direction of the price effects following reclassification depends significantly upon this distinction. Moreover, for firm-specific reclassifications, the negative price effect is greater where the firm has been underperforming its sector, suggesting that investors may be sceptical about the motives underlying a change of focus. Furthermore, a stock’s return comovement with the FTSE All-Share Index may be affected by it being reclassified into a new sector. This change in return comovement is consistent with the allocation of stocks into categories, as discussed by Barberis and Shleifer (2003). Reclassification can induce common factors in the returns to stocks in an index without there being any change in these stocks’ fundamental cash flows.

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    Bibliographic Info

    Paper provided by Economics and Finance Section, School of Social Sciences, Brunel University in its series Public Policy Discussion Papers with number 03-23.

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    Length: 27 pages
    Date of creation: Nov 2003
    Date of revision:
    Handle: RePEc:bru:bruppp:03-23

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    Postal: Brunel University, Uxbridge, Middlesex UB8 3PH, UK

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