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Review of Quantitative Finance and Accounting

Erschienen in:

01.01.2014 | Original Research

Asymmetric stock price and liquidity responses to changes in the FTSE SmallCap index

verfasst von: Ernest N. Biktimirov, Boya Li

Erschienen in: Review of Quantitative Finance and Accounting | Ausgabe 1/2014

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Abstract

We examine market reactions to changes in the FTSE SmallCap index membership, which are determined quarterly based on market capitalization and are free of information effects. Our main results are asymmetric price and liquidity responses between the firms that are shifted between FTSE indexes and the firms that are new to FTSE indexes. Firms promoted from a smaller-cap to a larger-cap FTSE index experience a permanent increase in stock price accompanied by improvements in liquidity. Similarly, firms demoted from a larger-cap to a smaller-cap FTSE index experience a permanent decrease in stock price accompanied by declines in liquidity. In contrast, firms added to the FTSE SmallCap index that were not previously in FTSE indexes show a transitory price gain and declines in liquidity. The results support the liquidity and price pressure hypotheses.

Vorheriger Artikel Earnings management and IPO anomalies in China

Nächster Artikel Corporate cash holdings and political connections

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As robustness checks, we also use a market model and two other proxies for the market return: the FTSE All-Share value-weighted and Datastream UK equal-weighted indexes. Neither the market model nor the choice of the proxies for the market return affects the general results.

We also compute a nonparametric sign test suggested by Corrado and Zivney (1992) and Cowan (1992). The results are qualitatively unchanged and are not shown here to save space.

We thank two anonymous reviewers for suggesting these samples.

The Alternative Investment Market (AIM) is a sub-market of the London Stock Exchange. It does not have minimum market capitalization requirement and has a less stringent regulatory system than that applied to the main market.

Ajinkya and Jain (1989) and Cready and Ramanan (1991) suggest log transformation of the volume data to approximate a normal distribution. Similar to Cready and Ramanan, we add 0.000255 to the daily percentage of shares outstanding to accommodate zero volume.

Given that the composition of the FTSE All-Share index changes from one year to another, we use January’s index constituent list to calculate daily market volume for that year.

As robustness checks, we also used 45-day and 90-day periods. The results are qualitatively unchanged.

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Titel: Asymmetric stock price and liquidity responses to changes in the FTSE SmallCap index
verfasst von: Ernest N. Biktimirov
Boya Li
Publikationsdatum: 01.01.2014
Verlag: Springer US
Erschienen in: Review of Quantitative Finance and Accounting / Ausgabe 1/2014
Print ISSN: 0924-865X
Elektronische ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-012-0335-7

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