Does index addition add any new information? Evidence from REIT dividend forecasts

The information-free event hypothesis associated with index additions has been very well documented in the finance literature. Most studies confirm that index addition conveys positive information about the future prospect of firms recently added to an index. However, this may not be the case for REITs, which are considered to have higher informational efficiency due to the transparent nature of their balance sheet. Using a sample of 108 additions to the S&P REIT Index over a period of 2000-2011, we test this hypothesis using analyst dividend forecasts. Our results are different from those found by similar studies in finance for non-REIT stocks. In most of the cases and consistent with our a priori expectations, the findings suggest that index addition announcement may not reveal much information beyond what is available from a REIT's balance sheet. Specifically, our results suggest different responses of the analysts to the index announcement depending upon the type of revision to the dividend forecast. For positive revised estimates, the announcement does not seem to add any new information to the analysts. However, for the two other scenarios, i.e. negative revised estimates and no revision to the estimates, the results show some evidence of information bias. Thus, we see an asymmetric response depending on the type of revision made by the analyst. However, when we look at the longer time horizon between the forecasts, we find no influence of the index addition news for any of the cases analysed. Further, our results are robust to using EPS as a measure of analyst forecast as well.