nach oben

Journal of Economics and Finance

Erschienen in:

01.10.2012

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

verfasst von: Marek Marciniak

Erschienen in: Journal of Economics and Finance | Ausgabe 4/2012

Einloggen

Aktivieren Sie unsere intelligente Suche, um passende Fachinhalte oder Patente zu finden.

search-config

KI-gestützte Suche

Aus

Abstract

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.

Vorheriger Artikel Incentive to manipulate earnings and its connection to analysts’ forecasts, trading, and corporate governance

Nächster Artikel Information dynamics effects from major world markets to SAARC nations

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Most prior studies have examined the phenomenon of stock index changes in reference to S&P 500 and S&P 600 indices. I am not aware of earlier research on wealth effects of additions to the S&P 400 index.

I have based the discussion of the guidelines for firm selection on the following document from the S&P website: http://www2.standardandpoors.com/spf/pdf/index/SP_MidCap_400_Factsheet.pdf.

Financial viability is defined by the S&P as four consecutive quarters of positive as-reported earnings prior to the announcement date.

The stocks of added firms must trade at prices that do not affect their liquidity. Low stock prices can decrease liquidity and can signal financial distress. Thus, low stock prices depress market capitalization values.

This implies that the industry composition of the S&P indices depends on the segment of the market captured by a given index. To be specific, the industry mosaic of the small-cap firms in the S&P 600 index should differ from that of the large-cap firms in the S&P 500 index. Industry representation in each index within the family of the S&P indices is indirectly conditioned by the market capitalization ranges that a particular index targets.

S&P 400 has been implied in studies that have considered upward shifts (deletions) from S&P 600 and downward shifts (deletions) from S&P 500.

http://www2.standardandpoors.com/spf/pdf/index/SP_MidCap_400_Factsheet.pdf

While the biggest S&P 400 firm is, on average, four times bigger than the smallest one, the biggest S&P 500 firm could be manifold times larger than the smallest permissible one since, theoretically, there is no upper limit on market capitalization for S&P 500 firms. In the case of S&P 600, the biggest firm is, on average, five times bigger than the smallest one.

I confine my study to analyzing the price effects of stock index additions. Although the wealth effects of deletions from S&P 500 and S&P 600 have been investigated in prior research alongside additions, announcements of deletions, unlike those of additions, are not pure surprises since they are normally preceded by such corporate events as takeovers, bankruptcies, liquidations, and extended periods of poor financial performance.

The imperfect substitute hypothesis, also known as the distribution effect hypothesis, qualitatively leads to the same conclusions as the downward sloping curve hypothesis (Harris and Gurel, 1986). It is grounded on the premise that stocks are not perfect substitutes for each other and, hence, long-term demand is not perfectly elastic. Equilibrium prices increase with demand curve shifts to clear excess demand. Consequently, prices are expected to persist at new equilibrium levels to reflect a new distribution of stockholders.

Since S&P 600 occupies the lowest rank in the hierarchy of S&P indices, it is impossible to compare the price effects of pure additions with those of upward transfers. In the case of S&P 400 or S&P 500 firms can be formed into two samples: those that come from outside the S&P universe and those shifted upwards from a lower level index, i.e., S&P 600 and S&P 400, respectively. In their analyses, Docking and Dowen (2006) as well as Shankar and Miller (2006) consider upward shifts from S&P 600 to S&P 400 and report evidence of a small, permanent increase when a firm transfers to a more prestigious index. They explain the price effects for the subgroups of additions to S&P 600 and deletions from the index in terms of the investor awareness hypothesis.

They also find some weak evidence suggesting that the magnitude and speed of price reversal is negatively related to the size of a firm. The smaller the firm is, the more rapidly its announcement-day returns will reverse themselves, which is consistent with the earlier findings for S&P 500 additions.

In the most extreme case, a firm could have been matched on market capitalization as of December 31 of the previous year, and the announcement came at the end of December of the following year. One year can make a difference in the growth of a firm’s market capitalization, especially when that firm is on the borderline between S&P 400 and S&P 500 in terms of its market cap.

Actually, the author eliminates from the matching pool those firms that are added or deleted from S&P 500 in the same year as the added firm. Nonetheless, she fails to control for firms that have been members of S&P 500 for a long time.

Both the price pressure hypothesis and downward sloping curve hypothesis would predict no variability in wealth effects across different firm characteristics included in stock index addition announcements.

In spite of the fact that the market cap values of the added firms are not provided in press releases at the announcement, the market cap ranges for each index are known in advance.

Since the announcements are released to the press after trading hours, I consider the day following the initial press announcement as the actual date of announcement of index addition.

Since the effective date of inclusion in the index is not known at the date of the announcement for many firms or it is different from the date on the Standard and Poor’s website, in subsequent analysis I use the effective dates of addition to S&P 400, as provided by the Standard and Poor’s on its website.

Although those cases represent additions to the S&P 400 index, they involve a downward shift from a higher level index, i.e., S&P 500. In this paper I limit my analysis to pure additions and upward shifts from a lower level index, i.e., S&P 600.

The inclusion of the firms that have been spun off or the firms that have been involved in M&A activity around the time of changes to the S&P 400 would make it difficult to separate the effect of spinoffs and M&A activity from the effect of inclusion in the index for those firms.

The S&P 400 list of index changes contains Psychiatric Solutions Inc., while the announcement in Lexis Nexis mentions Psychiatric Security Inc.

In 3 cases, the S&P committee has initially announced the inclusion of those companies in the index at an earlier date and then modified its earlier decision at a later date.

A firm with multiple class shares poses a challenge to finding four-digit SIC code industry matches.

Including the firms in the analysis that are added to the index in response to same industry firms being deleted from the index would make it difficult to separate the positive event of industry addition (as embodied by the firm added to the index) from the negative event of same industry deletion (as embodied by the firm deleted from the index that share the four-digit SIC code with the firm included in the index).

I also include the firms whose market capitalization is equal to $600 million or greater to make sure that I do not omit the firms that have been present in the S&P 400 index for some time but whose market value of equity has been below the market cap ranges recommended by the S&P committee around the announcement dates considered.

Selecting firms with the same share code helps eliminate non-US firms from the universe of potential candidates for inclusion in the S&P 400 index. Thus, I use share code as a proxy for the U.S. company criterion followed by the S&P index committee.

This criterion corresponds to the “adequate liquidity and reasonable price” policy employed by the S&P committee to screen potential candidates for index inclusion. The S&P committee utilizes “the ratio of annual dollar value traded to market capitalization for the company” to control for this criterion. In the paper I require the stock prices of all the matching firms to be equal to or greater than $10 for all the observations in the (−40,−10) market cap estimation window. My choice of proxy is based on the assumption that firms with stock prices below $10 are likely to have experienced negative earnings in one or more consecutive quarters. As a result, even if a firm’s stock price is barely above $10, its likelihood of poor financial performance would be very high.

This criterion corresponds to the “financial viability” rule as applied to index additions by the S&P committee. The actual accounting measure mentioned on the S&P website is “as-reported earnings,” where “as-reported earnings” is defined as “GAAP Net Income excluding discontinued operations and extraordinary items.” I use the S&P core earnings for preceding four quarters as a proxy for financial viability. I retrieve both S&P core earnings and net income (loss) from Compustat for all the non-member rival firms considered. In very few cases when S&P core earnings are unavailable and the pool of potential non-member rival firm matches is limited, I consider non-member rival firms financially viable if they have four positive quarters of net income prior to a given announcement date. I justify this move in two ways. First, I have observed that not all the firms added to the S&P 400 index have four quarters of positive as-reported earnings. Second, both measures of earnings, i.e., S&P core earnings and net income, do not significantly differ from each other.

The relative market capitalization index is calculated for each subcategory in Table 2 by dividing the mean and median values of the market capitalization for each subcategory by the respective mean and median values of the market capitalization for the entire sample.

I conduct the independent two-sample t-test, assuming the variances of the populations to be equal.

Unreported in the paper, the mean and median market capitalization of the companies shifted to the S&P 500 index is over three times as high as the market capitalization of an average firm added to the S&P 400 index, whereas the mean and median market capitalization of the firms deleted from the index because of low market capitalization, transfers to the S&P 600 index, lack of industry representation and other unknown reasons constitutes only over 20 percent of the mean and median market capitalization values for an average company added to the S&P 400 index. The companies targeted as objects of acquisitions or involved in merger activity are, on average, bigger than the firms added to the S&P 400 index.

Announcements about changes to S&P stock indices are released to the press in the after-trading hours.

I analyze the wealth effects of stock additions to the S&P 400 index from the viewpoint of the announcement day for the entire sample as well as all the subsamples. I use the effective day for the entire sample only. There are discrepancies between the effective date included in the original press release and that provided by the S&P. I believe that the announcement day is more important than the effective day since once the S&P committee announces which firms will be added to S&P 400, the effective date of incorporation is no longer new information.

The maximum likelihood estimate of the variance is,

$ S_{{A_{it}}}^2 = S_{{A_i}}^2\left[ {1 + \frac{1}{{{M_i}}} + \frac{{{{\left( {{R_{mt}} - \overline {{R_{mEst}}} } \right)}^2}}}{{\mathop \sum \nolimits_{k = {E_1}}^{{E_2}} {{\left( {{R_{mk}} - \overline {{R_{mEst}}} } \right)}^2}}}} \right] $, where $ S_{{A_i}}^2 = \frac{{\mathop \sum \nolimits_{k = {E_1}}^{{E_2}} AR_{ik}^2}}{{{M_i} - 2}} $

R _mt is the observed return on the value-weighted CRSP index on day t, $ \overline {{R_{mEst}}} $ is the mean return on the value-weighted CRSP index over the estimation period and M _i is the number of non-missing trading days in the interval E ₁ = −200 through E ₂ = −46 used to estimate the parameters for firm i.

As regards the type of addition, I will only include the pure additions and upward shifts in the analysis. The REIT firms are the only firms with dual membership in the family of the S&P 400 indices. Following the addition to the S&P 400 index they retain their membership in the S&P U.S. REIT Composite Index. By contrast, the pure additions are not members of any S&P index before inclusion in the S&P 400 index and the upward shifts migrate from the small cap S&P index to the mid cap S&P index.

Since AMEX is represented by one added firm, I will limit my investigation to the firms listed on NYSE and NASDAQ.

As a result, low market capitalization as the third reason for index changes becomes the base term and is reflected in the intercept term.

Those upward “deletions” experience positive wealth effects at the announcement since they are transfers from a lower-cap to a larger-cap index (Docking and Dowen 2006).

Firms that are removed from an index due to lack of representation or low market capitalization experience a significant price decrease at the announcement, while a response tends to be neutral for firms deleted because of mergers and acquisitions (Docking and Dowen 2006).

Beneish MD, Whaley RE (1996) An anatomy of the “S&P Game”: the effects of changing the rules. J Finance 51:1909–1930

Brown SJ, Warner JB (1985) Using daily stock returns: the case of event studies. J Financ Econ 14:3–31CrossRef

Cai J (2007) What’s in the news? Information content of S&P additions. Financ Manage 36:113–124CrossRef

Chen H, Noronha G, Singal V (2004) The price response to S&P 500 index additions and deletions: evidence of asymmetry and a new explanation. J Finance 59:1901–1929CrossRef

Denis DK, McConnell JJ, Ovtchinnikov AV, Yu Y (2003) S&P 500 index additions and earnings expectations. J Finance 57:1821–1840

Dhillon U, Johnson H (1991) Changes in the standard and poor’s 500 list. J Bus 64:75–85CrossRef

Docking DS, Dowen RJ (2006) Evidence on stock price effects associated with changes in the S&P 600 smallcap index. Q J Bus Econ 45:89–114

Elliott WB, Warr RS (2003) Price pressure on the NYSE and NASDAQ: evidence from S&P 500 index changes. Financ Manage 32:85–99CrossRef

Fama E, Fisher L, Jensen MC, Roll RW (1969) The adjustment of stock prices to new information. Int Econ Rev 10:1–21CrossRef

Harris L, Gurel E (1986) Price and volume effects associated with changes in the S&P 500 list: new evidence for the existence of price pressure. J Finance 41:815–829

Jain PC (1987) The effect on stock price from inclusion or exclusion from the S&P 500. Financ Anal J 43:58–65CrossRef

Lynch AW, Mendenhall RR (1997) New evidence on stock price effects associated with changes in the S&P 500 index. J Bus 70:351–383CrossRef

Patell J (1976) Corporate forecasts of earnings per share and stock price behavior: empirical tests. J Acc Res 14:246–276CrossRef

Shankar GS, Miller JM (2006) Market reaction to changes in the S&P SmallCap 600 index. Financ Rev 41:339–360CrossRef

Shleifer A (1986) Do demand curves for stocks slope down? J Finance 41:579–590CrossRef

Woolridge JR, Ghosh C (1986) Institutional trading and security prices: the case of changes in the composition of the S&P 500 index. J Financ Res 9:1–12

Titel: Information effects of announced stock index additions: evidence from S&P 400
verfasst von: Marek Marciniak
Publikationsdatum: 01.10.2012
Verlag: Springer US
Erschienen in: Journal of Economics and Finance / Ausgabe 4/2012
Print ISSN: 1055-0925
Elektronische ISSN: 1938-9744
DOI: https://doi.org/10.1007/s12197-010-9153-8

Springer Professional

Abstract

Bitte loggen Sie sich ein, um Zugang zu Ihrer Lizenz zu erhalten.

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Wirtschaft"

Weitere Artikel der Ausgabe 4/2012

A model for risky cash flows and tax shields

Recent evidence on determinants of per residential customer electricity consumption in the U.S.: 2001-2005

Information dynamics effects from major world markets to SAARC nations

Does mandatory disclosure affect subprime lending to minority neighborhoods?

Incentive to manipulate earnings and its connection to analysts’ forecasts, trading, and corporate governance

Managerial hedging ability and firm risk