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Information Costs and Liquidity Effects from Changes in the Dow Jones Industrial Average List

  • Beneish, Messod D.
  • Gardner, John C.
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    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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    Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

    Volume (Year): 30 (1995)
    Issue (Month): 01 (March)
    Pages: 135-157

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    Handle: RePEc:cup:jfinqa:v:30:y:1995:i:01:p:135-157_00
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