S&P 500 Inclusions and Stock Supply

Abstract

I provide new evidence of the S&P500 inclusion effect that highlights the importance of stock supply. If excess demand from S&P500-linked capital drives the inclusion effect, it should depend as well on the effective supply of a stock. Standard & Poor’s index methodology gives two distinct features of a stock’s ownership composition a supply interpretation. Both measures significantly predict the cross-sectional size of inclusion returns. Switching to free-floating index weights in 2005 enables a quasi-natural experiment to one proxy and a placebo test to the other. Finally, evidence from the most recent decade indicates that any persistence in the inclusion effect has disappeared.

Keywords: S&P 500 additions, price pressure, control ownership, free-float index weight adjustment, arbitrage capital, downward-sloping demand for stocks

JEL Classification: G12, G14, G32, D40