Market Reactions to Changes in the Dow Jones Industrial Average Index

International Journal of Managerial Finance 15 (5), 2019, 792-812

48 Pages Posted: 6 Apr 2020

See all articles by Ernest N. Biktimirov, Ph.D., CFA

Ernest N. Biktimirov, Ph.D., CFA

Brock University, Goodman School of Business

Yuanbin Xu

Brock University - Faculty of Business

Date Written: 2019

Abstract

Purpose − The purpose of this study is to examine changes in stock returns, liquidity, institutional ownership, analyst following, and investor awareness for companies added to and deleted from the Dow Jones Industrial Average (DJIA) index. Previous studies report conflicting evidence regarding the market reactions to changes in the DJIA index membership.

Design/methodology/approach − This study uses the event study methodology to calculate abnormal returns and trading volume around the announcement and effective days of DJIA index changes from 1929 to 2015. It also tests for significant changes in liquidity, institutional ownership, analyst following, and investor awareness in the 1990–2015 period. Multivariate regressions are used to perform a simultaneous analysis of competing hypotheses.

Findings – This study resolves the mixed results of previous DJIA index papers by documenting different stock price and trading volume reactions over the 1929–2015 period. Focusing on the most recent period, 1990–2015, the study finds that stocks added to (deleted from) the index experience a significant permanent stock price gain (loss). The observed stock price reaction seems to be associated with changes in liquidity proxies thus lending support for the liquidity hypothesis.

Research limitations – Limited data availability for the periods prior to 1990 prevents this study from identifying the exact reasons for different stock price and trading volume reactions across sub-periods of the 1929–2015 period.

Originality/value – This study provides the most comprehensive examination of market reactions to changes in the DJIA index and resolves the mixed results of previous studies. A better understanding of market reactions around the DJIA index changes can help both individual and institutional investors with developing effective trading strategies and index managing companies with designing optimal announcement policies.

Keywords: Abnormal return, Dow Jones Industrial Average index, Event study, Index changes, Liquidity, Stock prices

JEL Classification: G12, G14

Suggested Citation

Biktimirov, Ernest N. and Xu, Yuanbin, Market Reactions to Changes in the Dow Jones Industrial Average Index (2019). International Journal of Managerial Finance 15 (5), 2019, 792-812, Available at SSRN: https://ssrn.com/abstract=3551663

Ernest N. Biktimirov (Contact Author)

Brock University, Goodman School of Business ( email )

1812 Sir Isaac Brock Way
St. Catharines, Ontario L2S 3A1
Canada
905-688-5550 Ext. 3843 (Phone)

Yuanbin Xu

Brock University - Faculty of Business ( email )

St. Catharines, Ontario L2S 3A1
Canada

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