Price effects associated with changes in the Standard & Poor’s 500 index composition: The removal and replacement of seven non-US companies

This paper examines price effects associated with additions and deletions to the Standard and Poor’s (SP) 500 index. The results are by and large consistent with those found in previous studies such as Beneish and Whaley (1996; 2002), Lynch and Mendenhall (1997), and Harris and Gurel (1986). That is, firms that are added to the Index experience positive price effects and firms that are deleted experience negative price effects. The price adjustments in this study exhibit short-run patterns that appear on the surface to be inconsistent with market efficiency. However, the existence of structural impediments in the price adjustments does not necessarily imply that abnormal returns are there for the picking. This paper concludes by discussing investor psychology and how it complicates the process of trying to create trading strategies to gain excess returns on the observed price effects.UnpublishedAmihud, Y. and Mendelson, H. (1986), “Asset pricing and the bid-asked spread”, Journal of Financial Economics, vol. 14, pp. 223-249 Beneish, M. and Whaley, R. (1996), “S&P Game: The effects of changing the rules”, The Journal of Finance, vol. 51, no. 5, Dec, pp. 1909 Beneish, M. and Whaley, R. (2002), “S&P 500 index replacements”, Journal of Portfolio Management, vol. 29, no. 1, Fall, pp. 51-61 Blitzer, D. (2002), “Focusing The S&P 500 On the U.S. Large Cap Stocks And The Removal Of Non-U.S. Companies In The S&P 500”, Standard & Poor’s Report Bos, R. (2000), “Event Study: Quantifying the Effect of Being Added to an S&P Index”, Standard & Poor’s Report Brown, S., and Warner, J. (1985), “Using daily stock returns: The case of event studies”, Journal of Financial Economics, vol 14, no.1, pp. 3-31 Dash, S. (2002), “Price Changes Associated with S&P 500 Deletions: Time Variation and Effect of Size and Share Price”, Standard & Poor’s Report Eventus®. (2001), Eventus® User’s Guide: Software Version 7.0, 2nd ed, Cowan Research LC Fama, E. (1998), “Market Efficiency, Long-term Returns and Behavioral Finance”, Journal of Financial Economics, vol. 49, no. 3, March, pp. 283-306 Harris, L. and Gurel, E. (1986), “Price and Volume Effects Associated with Changes in the S&P 500 List: New Evidence for the Existence of Price Pressures”, The Journal of Finance, vol. 41, no. 4, pp. 815-830 Keynes, J. (1936), The General Theory of Employment and Money, Macmillan and Co limited, London Lintner, J. (1965), “The Valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets”, Review of Economics and Statistics, vol. 47, pp.13-37 Lynch, A. and Mendenhall, R. (1997), “New evidence on stock price effects associated with changes in the S&P 500 Index”, The Journal of Business, vol. 70, no. 3, July, pp. 351-384 Patell, J. (1967), “Corporate Forecasts of Earnings Per Share and Stock Price Behavior: Empirical Tests”, Journal of Accounting Research, vol. 14, no. 2, pp. 246-274 Sharpe, W. (1964), “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk”, Journal of Finance, vol 19, pp. 425-442 Shleifer, A. (1989), “Do Demand Curves for Stocks Slope Down?”, Journal of Finance, vol. 41, no. 3, pp.579-590 Standard & Poor's, a division of The McGraw-Hill Companies (2003), (Standard and Poor’s), Available: http://www2.standardandpoors.com (Accessed: 2003, July 11