S&P 500 Index Additions and Earnings Expectations

Posted: 22 Nov 2002  

Diane K. Denis

University of Pittsburgh - Katz School of Business

John J. McConnell

Purdue University

Alexei V. Ovtchinnikov

HEC Paris - Finance Department

Yun Yu

Wescott Financial Advisory Group LLC

Multiple version iconThere are 2 versions of this paper

Abstract

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

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

Diane K. Denis (Contact Author)

University of Pittsburgh - Katz School of Business ( email )

368B Mervis Hall
Pittsburgh, PA 15260
United States
412-624-0296 (Phone)

John J. McConnell

Purdue University ( email )

MGMT, KRAN
403 West State St.
West Lafayette, IN 47907-2056
United States
765-494-5910 (Phone)
765-494-7863 (Fax)

Alexei V. Ovtchinnikov

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

Yun Yu

Wescott Financial Advisory Group LLC ( email )

One Liberty Place, 42nd Floor
Philadelphia, PA 19010
United States

Paper statistics

Abstract Views
1,231