Stock Index changes (other indices) – paper review

Previously, we have reviewed the academic literature on index changes for the FTSE 100 and S&P 500 indices; here we present a brief review and listing of academic papers on other indices.

This article presents a brief review and listing of academic papers on stock index changes.


Generally, most of the papers found similar effects for companies added to or deleted from indices as has previously been reported for the S&P 500 and FTSE 100 indices. Namely, shares experience positive abnormal returns and increased trading volumes following the announcement of their addition to an index.

An exception was Beneish and Gardner (1995) who found that share prices and volumes were not affected for new DJIA companies (probably due to a lack of index funds associated with the DJIA) although shares saw big falls when deleted from the index.

Shankar and Miller (2006) found that shares experienced greater increases (declines) when companies were introduced (deleted) from the series of S&P indices, than those companies that just moved between S&P indices.

One of the greatest points of difference is whether the index change effects on shares are permanent or temporary. The papers finding the effects permanent were: Hacbedel (2007) with respect to the MSCIEM, and Liu (2011) for the Nikkei 225. While those finding the effects temporary were: Shankar and Miller (2006) for the S&P SmallCap 600 Index,  Chakrabarti, Huang, Jayaraman and Lee (2005) for the MSCI indices, and Biktimirov, Cowan and Jordan (2004) for the Russell 2000.


INDEX (of papers listed below)

[Papers listed in reverse date order; indicates major paper.]

  1. What Happens When a Stock is Added to the Nasdaq-100 Index? What Doesn’t Happen? [2014]
  2. Market reactions to changes in the Nasdaq 100 Index [2013]
  3. Regression Discontinuity and the Price Effects of Stock Market Indexing [2013]
  4. The price effects of index additions: A new explanation [2011]
  5. Does Inclusion in a Smaller S&P Index Create Value? [2010]
  6. Why Do Index Changes Have Price Effects? [2007]
  7. Market Reaction to Changes in the S&P SmallCap 600 Index [2006]
  8. Price and volume effects of changes in MSCI indices – nature and causes [2005]
  9. Do Demand Curves for Small Stocks Slope Down? [2004]
  10. Information Costs and Liquidity Effects from Changes in the Dow Jones Industrial Average List [1995]



What Happens When a Stock is Added to the Nasdaq-100 Index? What Doesn’t Happen?
Authors [Year]: Susana Yu, Gwendolyn P. Webb, Kishore Tandon [2014]
Journal [Citations]:
Abstract: Additions to the Nasdaq-100 Index are based primarily on market capitalization rather than on judgments about a firm’s stature in its industry. We analyze abnormal returns upon announcement that a stock will be added to the Nasdaq-100 Index in a multivariate analysis that incorporates several possible alternative factors. We find that only liquidity variables are significant, but that factors representing feedback effects on the firm’s operations and level of managerial effort are not. This evidence suggests that additions to the Nasdaq-100 Index are associated with liquidity benefits but not with certification effects of the type associated with additions to the S&P indexes.
Ref: BA006


Market reactions to changes in the Nasdaq 100 Index
Authors [Year]: Ernest N. Biktimirov and Yuanbin Xu [2013]
Journal [Citations]:
Abstract: We examine stock market reactions to changes in the Nasdaq 100 index. We find asymmetric price response accompanied by a significant increase in trading volume on the effective date. Firms added to the Nasdaq 100 Index experience significant increases ininstitutional ownership, the number of market makers, and the number of shareholders. In contrast, firms removed from the index show significant decreases in the number of institutional shareholders. Additions to the Nasdaq 100 Index also show significant increases in four liquidity measures, whereas deletions demonstrate significant decreases in two liquidity measures. These changes in liquidity are related to the abnormal return on the announcement day. Taken together, the results provide support for the liquidity hypothesis.
Ref: AA723


Regression Discontinuity and the Price Effects of Stock Market Indexing
Authors [Year]: Yen-cheng Chang and Harrison Hong and Inessa Liskovich [2013]
Journal [Citations]: NBER Working Paper, 19290
Abstract: Studies find price increases for additions to the S&P 500 index but no decreases for deletions. Additions come with good earnings news, suggesting these studies are not just measuring an indexing effect. We develop a regression discontinuity design using Russell Indices for cleaner identification. Stocks are assigned to indices based on their end-of-May market capitalizations. Stocks ranked just below 1000 are in the Russell 2000. The indices are value-weighted so these stocks receive index buying whereas those just above 1000 have close to none. Using this random assignment, we find price effects for both additions and deletions.
Ref: AA725


The price effects of index additions: A new explanation
Authors [Year]: Shinhua Liu [2011]
Journal [Citations]: Journal of Economics and Business, 63(2), pp152–165 [3]
Abstract: We further explore a new volatility explanation for the permanent price effect of index additions, using a sample of changes in the Nikkei 225. Additions to the index elicit significant price hikes, which tend to be permanent despite temporary price reversals. Meanwhile, investor awareness and demand increase, while price volatility decreases for the added stocks, contrary to the higher price volatility for stocks added to the S&P 500. Moreover, multivariate regression analysis demonstrates that the lower volatility contributes significantly to the permanent price boost, a new explanation; so does the higher investor awareness, consistent with the prior literature.
Ref: AA727


Does Inclusion in a Smaller S&P Index Create Value?
Authors [Year]: John R. Becker-Blease and Donna L. Paul [2010]
Journal [Citations]: Financial Review, 45(2), pp307–330 [12]
Abstract: This study finds overall increases in equity value surrounding addition to the S&P SmallCap and MidCap indexes from 1996 to 2003 and investigates sources of the value gains. Following addition, there are significant increases in proxy variables for stock liquidity and investor recognition, and changes in these variables are impounded into the permanent component of announcement share price revisions. We also find that changes in capital investment intensity are increasing in changes in stock liquidity, consistent with a reduction in the cost of capital following index addition.
Ref: AA708


Why Do Index Changes Have Price Effects?
Authors [Year]: Burcu Hacbedel [2007]
Journal [Citations]:
Abstract: The positive price effect of index inclusion has been well-documented in the literature. The underlying cause still remains in dispute, since this finding is consistent with a number of hypotheses. In this paper, I revisit this debate by examining the price effects in the emerging markets setting using MSCIEM index changes. I find the inclusions to have a permanent price effect, while this is not the case for the exclusions. This result contradicts the demand and new information hypotheses, but is consistent with the investor awareness hypothesis. By making use of analysts’ recommendations data, I am able to show that there is a significant increase in coverage for the included stocks. This is also significantly related to the change in price.
Ref: AA726


Market Reaction to Changes in the S&P SmallCap 600 Index
Authors [Year]: S. Gowri Shankar and James M. Miller [2006]
Journal [Citations]: Financial Review, 41(3), pp339–360 [34]
Abstract: Firms added to (deleted from) the S&P 600 index experience a significant price increase (decrease) at announcement. Firms that newly enter (exit) the S&P universe experience a larger price increase (decrease) than firms that move between S&P indexes. Trading volumes are higher after the announcement and institutional ownership increases (decreases) following index additions (deletions). However, the price and volume effects are temporary and are fully reversed within 60 days, in contrast to the permanent effects reported for S&P 500 changes. Our results support the temporary price-pressure hypothesis and are similar to results reported for Russell 2000 index changes.
Ref: AA720


Price and volume effects of changes in MSCI indices – nature and causes
Authors [Year]: Rajesh Chakrabarti and Wei Huang and Narayanan Jayaraman and Jinsoo Lee [2005]
Journal [Citations]: Journal of Banking & Finance, 29(5), pp1237–1264 [51]
Abstract: Using changes in the MSCI Standard Country Indices for 29 countries between 1998 and 2001, we document that stock returns and volumes exhibit “index effects” in international markets similar to those detected by the studies of US stocks. The stocks added to the indices experience a sharp rise in prices after the announcement and a further rise during the period preceding the actual change, though part of the gain is lost after the actual change date. The stocks that are deleted from the indices, on the other hand, witness a steady and marked decline in their prices. Trading volumes increase significantly and remain at high levels after the change date for the added stocks. There are also considerable cross-country variations in these effects. Tests using data on various measures reflecting the different hypotheses fail to turn up any evidence in support of information effects. Our evidence appears to be more supportive of the downward sloping demand curve hypothesis. There is some evidence of price-pressure and mild evidence of liquidity effect, particularly in Japan and UK.
Ref: AA685


Do Demand Curves for Small Stocks Slope Down?
Authors [Year]: Ernest N. Biktimirov and Arnold R. Cowan and Bradford D. Jordan [2004]
Journal [Citations]: Journal of Financial Research, 27(2), pp161–178 [59]
Abstract: Stocks added to the S&P 500 generally experience positive abnormal returns following the announcement. Several competing explanations exist for this reaction, but small sample sizes and other issues make it difficult to distinguish among them. We examine this subject using the small-cap Russell 2000 index, which has several advantages over the S&P 500 in this context. Our primary finding is that stocks added to or deleted from the Russell 2000 experience significant changes in stock price and trading volume, but the effect is transitory. The results support the price pressure hypothesis.
Ref: AA709


Information Costs and Liquidity Effects from Changes in the Dow Jones Industrial Average List
Authors [Year]: Messod D. Beneish and John C. Gardner [1995]
Journal [Citations]: Journal of Financial and Quantitative Analysis, 30(1), pp135-157 [104]
Abstract: 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.
Ref: AA713


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