The S&P 500 Index Effect describes the tendency for companies joining the S&P 500 Index to experience a positive and permanent impact on their share prices and betas.
Academic research on the topic has addressed:
- Whether the effect actually exists and, if it does, if the effect is symmetric (i.e. do companies leaving the index experience a fall in price and beta), and whether the effect is permanent.
- What causes the effect
- Are these S&P 500 index changes information-free events
- The effect on index funds
This article presents a brief review and listing of academic papers on the S&P 500 Index Effect.
1. Form of the effect
The following papers found that the share prices of companies joining the S&P 500 Index experienced positive abnormal returns and that this effect was permanent: Beneish and Whaley (1997), Beneish and Whaley (2002), Chen, Noronha and Singal (2004), Cai (2007), Kappou, Brooks and Ward (2008) and Hrazdil and Scott (2009).
2. Causes of the effect
Several possible causes for the effect have been proposed-
Analyst coverage increases: Kalok Chan and Hung Wan Kot and Gordon Y.N. Tang (2013).
Operating performance of the companies improves: Denis, McConnell, Ovtchinnikov and Yu (2003), Kalok Chan and Hung Wan Kot and Gordon Y.N. Tang (2013), Jain (1987) and Dhillon and Johnson (1991).
3. An information-free event?
The following found that inclusion in the S&P 500 Index was not an information-free event: Geppert, Ivanov and Karels (2011), Gygax and Otchere (2010), Cai (2007) and Denis, McConnell, Ovtchinnikov and Yu (2003).
4. The effect on index funds
The following papers looked at the effect of index changes on index funds: Madhavan and Ming (2002), Chen, Noronha and Singal (2006), Dunham and Simpson (2010), Kappou, Brooks and Ward (2010) and Green and Jame (2011).
INDEX (of papers listed below)
[Papers listed in reverse date order; ♠ indicates major paper.]
- Stock price response to S&P 500 index inclusions: Do options listings and options trading volume matter? 
- A comprehensive long-term analysis of S&P 500 index additions and deletions 
- Media coverage, analyst recommendation upgrade and information content of inclusions into S&P indexes 
- Is There an S&P 500 Index Effect? 
- An examination of the information content of S&P 500 index changes: Analysis of systematic risk 
- Strategic trading by index funds and liquidity provision around S&P 500 index additions 
- Comovement Revisited 
- Asymmetric Changes in Stock Prices and Investor Recognition Around Revisions to the S&P 500 Index 
- Do Index Fund Managers Trade Opportunistically Around Index Changes? An Empirical Examination of S&P 500 Index Funds 
- Analysis of the probability of deletion of S&P 500 companies: Survival analysis and neural networks approach 
- S&P 500 Index Inclusions and Analysts’ Forecast Optimism 
- The S&P500 index effect reconsidered: Evidence from overnight and intraday stock price performance and volume 
- Index composition changes and the cost of incumbency 
- S&P 500 Index Revisited: Do Index Inclusion Announcements Convey Information about Firms’ Future Performance? 
- The Effect of Demand on Stock Prices: Evidence from the S&P Index Float Adjustment 
- A re-examination of the index effect: Gambling on additions to and deletions from the S&P 500′s ‘gold seal’ 
- What’s in the News? Information Content of S&P 500 Additions  ♠
- What Drives the S&P 500 Inclusion Effect? An Analytical Survey  ♠
- Index Changes and Losses to Index Fund Investors  ♠
- The addition and deletion effects of the standard & poor’s 500 index and its dynamic evolvement from 1990 to 2002: demand curves, market efficiency, information, volume and return 
- Comovement  ♠
- The Price Response to S&P 500 Index Additions and Deletions: Evidence of Asymmetry and a New Explanation  ♠
- The liquidity effects of revisions to the S&P 500 index: an empirical analysis  ♠
- Price Pressure on the NYSE and Nasdaq: Evidence from S&P 500 Index Changes 
- S&P 500 Index Additions and Earnings Expectations  ♠
- S&P 500 Index Replacements 
- The Hidden Costs of Index Rebalancing: A Case Study of the S&P 500 Composition Changes of July 19, 2002 
- Does Arbitrage Flatten Demand Curves for Stocks? 
- Price Effects of Addition or Deletion from the Standard & Poor’s 500 Index: Evidence of Increasing Market Efficiency 
- The liquidity effects associated with addition of a stock to the S&P 500 index: evidence from bid/ask spreads 
- A Scorecard from the S&P Game 
- New Evidence on Stock Price Effects Associated with Charges in the S&P 500 Index  ♠
- An Anatomy of the “S&P Game”: The Effects of Changing the Rules  ♠
- Changes in the Standard and Poor’s 500 List  ♠
- Institutional Ownership and Changes in the S&P 500  ♠
- The Effect on Stock Price of Inclusion in or Exclusion from the S&P 500  ♠
- Price and Volume Effects Associated with Changes in the S&P 500 List: New Evidence for the Existence of Price Pressures  ♠
- Do Demand Curves for Stocks Slope Down?  ♠
- Does Delisting from the S&P 500 Affect Stock Price? 
Stock price response to S&P 500 index inclusions: Do options listings and options trading volume matter?
Authors [Year]: Yangyang Chen and Constantine Koutsantony and Cameron Truong and Madhu Veeraraghavan 
Journal [Citations]: Journal of International Financial Markets, Institutions and Money, 23, pp379–401
Abstract: This study investigates the stock price response to Standard & Poor’s (S&P) 500 index inclusions during the period 1996–2010 and the role of options listings and options trading volume with regard to the information content of index inclusion announcements. Specifically, we address the following questions: (1) Is the magnitude of abnormal returns from the announcements of S&P 500 inclusions significantly lower for stocks with options listings? and (2) Is the magnitude of abnormal returns from the announcements of S&P 500 inclusions significantly lower for stocks with a high level of options trading volume? Our findings indicate that options listings themselves are not related to the magnitude of abnormal returns from the announcements of S&P 500 inclusions. We also find that greater levels of options trading volume do not convey private information about the S&P 500 index changes. We document that any measurable impact of options trading on the stock price response to S&P 500 inclusion announcements lies primarily in the level of abnormal options trading volume in the period immediately preceding the announcements.