S&P 500 Index Additions and Earnings Expectations
Diane K. Denis
University of Pittsburgh - Katz School of Business
John J. McConnell
Alexei V. Ovtchinnikov
HEC Paris - Finance Department
Wescott Financial Advisory Group LLC
Journal of Finance, Forthcoming
Prior studies of stocks added to the S&P 500 Index report that Index inclusion is associated with a permanent increase in stock price. This result has been interpreted to mean that demand curves for stocks slope downward. A key premise underlying this interpretation is that Index inclusion provides no new information about the future prospects of the newly-included companies. We examine this premise empirically by analyzing changes in analysts' eps forecasts for newly-included companies from before to after Index inclusion and by comparing post-inclusion realized earnings to pre-inclusion earnings forecasts. We find that, relative to various benchmark companies, newly-included companies experience significant increases in eps forecasts and significant improvements in realized earnings. These results indicate that S&P Index inclusion is not an information-free event and, thus, undermine tests of the downward-sloping demand curve hypothesis that are based on S&P 500 Index additions.
JEL Classification: G29, G12, M41
Date posted: November 22, 2002
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