Posted: 22 Nov 2002
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
Suggested Citation: Suggested Citation
Denis, Diane K. and McConnell, John J. and Ovtchinnikov, Alexei V. and Yu, Yun, S&P 500 Index Additions and Earnings Expectations. Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=353460