Investor Awareness and Market Segmentation: Evidence from S&P 500 Index Changes
57 Pages Posted: 22 Mar 2002
Date Written: April 2002
Several studies have found that stock price changes resulting from firms added to the S&P 500 index can be best exp lained by a downward sloping demand curve. In this paper, we study price effects around both additions and deletions and find that the price effect of index changes is consistent with Merton's (1987) investor-awareness and market segmentation hypothesis. We find that the reduction in shadow cost of incomplete diversification that follows additions is correlated with abnormal returns accruing to the added stocks. We also find that the asymmetric price effects of additions and deletions that have not been explained by empirical studies thus far are consistent with market segmentation.
Note: Previous title: S&P 500 Index Changes and Investor Awareness
JEL Classification: G14
Suggested Citation: Suggested Citation