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An examination of the information content of S&P 500 index changes

Author

Listed:
  • John M. Geppert
  • Stoyu I. Ivanov
  • Gordon V. Karels

Abstract

Purpose - The purpose of this paper is to examine the shocks to firm's beta around the event of addition or deletion from the S&P 500 index. Design/methodology/approach - The total derivative of beta and Campbell and Vuolteenaho decomposition of beta methodologies are used, on monthly and daily basis, to examine the behavior of beta around the event. Findings - Results show a significant increase in correlations of the event firms' returns and the market proxy returns and cash‐flow betas, and decrease in discount‐rate betas for added firms and the opposite effects for deleted firms. Robustness tests indicate that the total derivative changes effects are typical for the event firms industry but that the cash‐flow correlation changes are specific to the firm. These findings suggest that addition or deletion from the S&P 500 index is not an information free event. Research limitations/implications - The Campbell and Vuolteenaho methodology has limitations – it is conditional on the selection of state variables. In future research it would be beneficial to use different state variables in the beta decomposition framework. Another relevant question for a future research is: what are the effects of the event on the Fama‐French factor model loadings? Originality/value - The paper's findings contribute to the ongoing debate in the literature of the information hypothesis for addition or deletion from the S&P 500 index.

Suggested Citation

  • John M. Geppert & Stoyu I. Ivanov & Gordon V. Karels, 2011. "An examination of the information content of S&P 500 index changes," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 10(4), pages 411-426, November.
    • Handle: RePEc:eme:rafpps:v:10:y:2011:i:4:p:411-426
    DOI: 10.1108/14757701111185353
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    References listed on IDEAS

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    1. Campbell, John Y, 1991. "A Variance Decomposition for Stock Returns," Economic Journal, Royal Economic Society, vol. 101(405), pages 157-179, March.
    2. Liu, Naiping & Zhang, Lu, 2008. "Is the value spread a useful predictor of returns?," Journal of Financial Markets, Elsevier, vol. 11(3), pages 199-227, August.
    3. John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," The Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 195-228.
    4. John Y. Campbell & Tuomo Vuolteenaho, 2004. "Bad Beta, Good Beta," American Economic Review, American Economic Association, vol. 94(5), pages 1249-1275, December.
    5. Harris, Lawrence E & Gurel, Eitan, 1986. "Price and Volume Effects Associated with Changes in the S&P 500 List: New Evidence for the Existence of Price Pressures," Journal of Finance, American Finance Association, vol. 41(4), pages 815-829, September.
    6. Geppert, John M. & Ivanov, Stoyu I. & Karels, Gordon V., 2010. "Analysis of the probability of deletion of S&P 500 companies: Survival analysis and neural networks approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(2), pages 191-201, May.
    7. Lynch, Anthony W & Mendenhall, Richard R, 1997. "New Evidence on Stock Price Effects Associated with Changes in the S&P 500 Index," The Journal of Business, University of Chicago Press, vol. 70(3), pages 351-383, July.
    8. Diane K. Denis & John J. McConnell & Alexei V. Ovtchinnikov & Yun Yu, 2003. "S&P 500 Index Additions and Earnings Expectations," Journal of Finance, American Finance Association, vol. 58(5), pages 1821-1840, October.
    9. Shleifer, Andrei, 1986. "Do Demand Curves for Stocks Slope Down?," Journal of Finance, American Finance Association, vol. 41(3), pages 579-590, July.
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    Cited by:

    1. Stoyu I. Ivanov, 2013. "Analysis of the Effects of Pre Announcement of S&P 500 Index Changes," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 7(5), pages 1-10.

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