Do Index Effects Reflect Idiosyncratic or Industry Effects? A Re-Examination of the Winners and Losers of S&P 500 Index Addition

Abstract

This paper provides new findings concerning additions to the S&P 500 Index. We present the first evidence of industry effects that occur when stocks are added to the S&P 500 Index. With over a trillion dollars in index funds wealth tied to the S&P 500 Index, index additions exert price pressures on not only the firms that are added to the index and but the incumbent industry counterparts as well. We find that the share price of an added firm's industry counterparts increase in the announcement date and decrease on the effective date. We provide evidence that portfolio rebalancing helps explain the effective date abnormal returns documented for the incumbent industry counterparts. In addition..