EFFECTS OF INDEX ADDITIONS ON STOCK PRICE INFORMATIVENESS
EFFECTS OF INDEX ADDITIONS ON STOCK PRICE INFORMATIVENESS

Summary/Abstract: Passive fund management has expanded rapidly over the past decade and has become a preferred tactic amidst investors from developed and developing countries alike. Scholars tend to attribute such a change of an investment strategy to the increase in stock market efficiency. Nonetheless, some studies show a reverse causality. Our study aims to uncover whether there is a dependency between a stock’s additions to an index and an increase/decrease in its price informativeness. We centered our study around S&P 500 between January 1993 and December 2017. As a result, a sample of 1178 additions that occurred during the analysis period was gathered. To test the null hypothesis, we applied the Harris and Gurel (1986) event study methodology using two different event windows to quantify for the non-stationarity effects. The results suggest that a stock’s addition to the S&P 500 Index affects the price informativeness in the event and post-event event windows, nonetheless, the effects of price informativeness over abnormal returns are only significant for the post-event window, whereas, for the ex-ante window, abnormal returns are arguably influenced by company-specific risk, suggesting more speculative practices rather than information-based decisions in the pre-event period. In line with other academic literature on this subject, the change in abnormal returns around the event date is attributed to an increase in liquidity and analyst coverage.

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