Index composition changes and the cost of incumbency
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.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
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.:
- Rakowski, David & Wang, Xiaoxin, 2009. "The dynamics of short-term mutual fund flows and returns: A time-series and cross-sectional investigation," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2102-2109, November.
- Ding, Bill & Shawky, Hany A. & Tian, Jianbo, 2009. "Liquidity shocks, size and the relative performance of hedge fund strategies," Journal of Banking & Finance, Elsevier, vol. 33(5), pages 883-891, May.
- Hertzel, Michael G, 1991. " The Effects of Stock Repurchases on Rival Firms," Journal of Finance, American Finance Association, vol. 46(2), pages 707-16, June.
- Kappou, Konstantina & Brooks, Chris & Ward, Charles, 2010. "The S&P500 index effect reconsidered: Evidence from overnight and intraday stock price performance and volume," Journal of Banking & Finance, Elsevier, vol. 34(1), pages 116-126, January.
- Shleifer, Andrei, 1986. " Do Demand Curves for Stocks Slope Down?," Journal of Finance, American Finance Association, vol. 41(3), pages 579-90, July.
- Eckbo, B. Espen, 1983. "Horizontal mergers, collusion, and stockholder wealth," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 241-273, April.
- Eckel, Catherine & Eckel, Doug & Singal, Vijay, 1997. "Privatization and efficiency: Industry effects of the sale of British Airways," Journal of Financial Economics, Elsevier, vol. 43(2), pages 275-298, February.
- Liu, Shinhua, 2009. "Index membership and predictability of stock returns: The case of the Nikkei 225," Pacific-Basin Finance Journal, Elsevier, vol. 17(3), pages 338-351, June.
- Li, Xiafei & Miffre, Joëlle & Brooks, Chris & O'Sullivan, Niall, 2008.
"Momentum profits and time-varying unsystematic risk,"
Journal of Banking & Finance,
Elsevier, vol. 32(4), pages 541-558, April.
- Xiafei Li & Chris Brooks & Joelle Miffre, 2006. "Momentum Profits and Time-Varying Unsystematic Risk," ICMA Centre Discussion Papers in Finance icma-dp2006-09, Henley Business School, Reading University, revised Sep 2006.
- Aditya Kaul & Vikas Mehrotra & Randall Morck, 1999.
"Demand Curves for Stocks Do Slope Down: New Evidence From An Index Weights Adjustment,"
Harvard Institute of Economic Research Working Papers
1884, Harvard - Institute of Economic Research.
- Aditya Kaul & Vikas Mehrotra & Randall Morck, 2000. "Demand Curves for Stocks "Do "Slope Down: New Evidence from an Index Weights Adjustment," Journal of Finance, American Finance Association, vol. 55(2), pages 893-912, 04.
- Aharony, Joseph & Swary, Itzhak, 1983. "Contagion Effects of Bank Failures: Evidence from Capital Markets," The Journal of Business, University of Chicago Press, vol. 56(3), pages 305-22, July.
- Otchere, Isaac, 2009. "Competitive and value effects of bank privatization in developed countries," Journal of Banking & Finance, Elsevier, vol. 33(12), pages 2373-2385, December.
- Brent W. Ambrose & Dong Wook Lee & Joe Peek, 2007. "Comovement After Joining an Index: Spillovers of Nonfundamental Effects," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 35(1), pages 57-90, 03.
- Asem, Ebenezer, 2009. "Dividends and price momentum," Journal of Banking & Finance, Elsevier, vol. 33(3), pages 486-494, March.
- Jeffrey Wurgler & Ekaterina Zhuravskaya, 2002.
"Does Arbitrage Flatten Demand Curves for Stocks?,"
The Journal of Business,
University of Chicago Press, vol. 75(4), pages 583-608, October.
- Firth, Michael, 1996. "Dividend Changes, Abnormal Returns, and Intra-lndustry Firm Valuations," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(02), pages 189-211, June.
When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:34:y:2010:i:10:p:2500-2509. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.