56 Pages Posted: 6 Nov 2012 Last revised: 6 Jun 2014
Date Written: March 2014
This paper finds that the permanent changes in market value and return comovement, previously attributed to S&P 500 index additions, reflect well-established regularities in asset returns independent of index membership. Specifically, we document that index additions are preceded by extraordinary market and earnings performance of the event firms and that – after accounting for this performance – the additions have no permanent effect on the firms’ market value and standard measures of systematic risk. The permanent value effect which has been attributed to index membership is a manifestation of the momentum in returns (Jegadeesh and Titman (1993)), while the change in comovement reflects declines in the loadings on size and value factors (Fama and French (1993)). Our results show the importance of addressing endogeneity for causal inference in event studies.
Keywords: S&P 500 inclusions, Pre-inclusion performance, Factor betas, Price and earnings momentum, Value effect
JEL Classification: G12, G15
Suggested Citation: Suggested Citation
By Andrew Ang