The Mysterious Growing Value of S&P 500 Membership

51 Pages Posted: 14 Dec 2001 Last revised: 30 Jan 2013

See all articles by Fan Yang

Fan Yang

affiliation not provided to SSRN

Randall Morck

University of Alberta - Department of Finance and Statistical Analysis; National Bureau of Economic Research (NBER); European Corporate Governence Institute; Asian Bureau of Finance and Economic Research

Date Written: December 2001

Abstract

The efficient markets hypothesis implies that passive indexing should generate as high a return as active fund management. Indexing has been a very successful strategy. We document a large value premium in the average q ratios of firms in the S&P 500 index relative to the q ratios of other similar firms that appears in the mid 1980s and grows in step with the growth of indexing. Passive investment strategies that require the purchase of the particular 500 stocks in this index increase demand for those stocks and so push up their prices. In short, indexing induces downward sloping demand curves for stocks in the index. For reasons that are not fully clear, arbitrageurs apparently do not correct this overvaluation.

Suggested Citation

Yang, Fan and Morck, Randall K., The Mysterious Growing Value of S&P 500 Membership (December 2001). NBER Working Paper No. w8654. Available at SSRN: https://ssrn.com/abstract=294092

Fan Yang

affiliation not provided to SSRN

Randall K. Morck (Contact Author)

University of Alberta - Department of Finance and Statistical Analysis ( email )

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National Bureau of Economic Research (NBER)

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European Corporate Governence Institute ( email )

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Asian Bureau of Finance and Economic Research ( email )

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Singapore

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