, Volume 36, Issue 4, pp 822-849
Date: 11 Sep 2010

Information effects of announced stock index additions: evidence from S&P 400

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The study examines the information content of press announcements of S&P 400 additions between 2002 and 2007. Prior research into stock index additions has explained the positive valuation effects of additions to S&P indices mostly in terms of the price pressure hypothesis and downward sloping curve hypothesis. The two hypotheses attribute the positive market reaction purely to index-fund buying rather than information effects of announcements. My empirical investigation further reinforces the credibility of the information hypothesis by showing that the market varies its response to added firms depending on the information released about them at the announcement. The analysis demonstrates that the mode of addition, exchange listing, reason for index change, and firm size can modulate valuation effects of stock index additions. The paper also strengthens the argument that announcements of additions to an S&P index contain new signals about the industries represented by the added firms. Positive and significant wealth effects are exclusively attributable to “non-member” rival firms. Overall, the results imply that the market discerns and rewards firms that come from outside the S&P universe (pure additions) and rival firms that are not part of a target index.