Posted: 27 Oct 1999
We examine the stock market effect of changes in the composition of the Dow Jones Industrial Average (DJIA). Unlike S&P 500 listing studies, we find that the price and the trading volume of newly listed DJIA firms are unaffected. We attribute this result to a lack of index fund rebalancing, since index trading is limited for most of our sample period and index funds mimic the S&P 500, not the DJIA. Firms removed from the index, however, experience significant price declines. We consider information signaling, price pressure, imperfect substitutes, and information cost/liquidity explanations for these asymmetric findings. The evidence is consistent with the information cost/liquidity explanation, which holds that investors demand a premium for higher trading costs and for holding securities that have relatively less available information.
JEL Classification: G14
Suggested Citation: Suggested Citation
Beneish, Messod Daniel and Gardner, John, Information Costs and Liquidity Effects from Changes in the Dow Jones Industrial Average List. JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS, Vol 30, No 1, March 1995. Available at SSRN: https://ssrn.com/abstract=6112