Market Reactions to Changes in the S&P 500 Index: An Industry Analysis

This paper observes the abnormal returns relative to the market’s returns for additions to and deletions from the S&P 500 index from 2000-2003. More importantly, I categorize additions and deletions by industries in order to see if any particular industry in the index has greater returns than others around change dates. The knowledge of how stocks in a particular industry react after an announcement may lead investors to favor some industries more than others when investing around a date of change to the S&P 500 index. This article is available in The Park Place Economist: http://digitalcommons.iwu.edu/parkplace/vol14/iss1/17 The Park Place Economist, Volume XIV 80 Introduction T he primary objective of the Standard & Poor’s 500 index is to be the performance benchmark for U.S. equity markets (Sui, stock in the member companies of the S&P 500. Sometimes, the S&P 500 deletes a stock from its index and adds another stock in its place. Stocks added to the index must have a large trading represent the industry that the company is a part of, and have a strong market value within its industry. In a way, the stock is a representative of its industry. If the stock is performing well, investors should be optimistic about the industry it is a part of. If investors knew how the stock prices of additions and deletions were going to investing in those industries with the largest price movements. In October of 1989, Standard and Poor started announcing future deletions and additions about 5 days before the actual change. When a change is announced, investors typically purchase shares in the soon to be added company before the S&P adds the company to its index. Beneish Game.” Speculators purchase the addition and sell the deletion because they trust that the S&P did extensive research on the future performance of the stocks’ earnings. The research done by the S&P basically provides free information or advice for investors and index funds. Additions to the S&P historically show large increases in return around the days of the announcement. Deletions show even larger negative returns around the announcement day explained by four hypotheses. The abnormal returns surrounding an announcement can allow stock or short sell the deleted stock. I predict that certain industries provide larger returns than others. This is important information for many investors and is the topic of this paper. The paper observes the abnormal returns relative to the market’s returns for additions to and deletions from the S&P 500 index from 2000-2003. More importantly, I categorize additions and deletions by industries in order to see if any particular industry in the index has greater returns than others around change dates. The knowledge of how stocks in a particular industry react after an announcement may lead investors to favor some industries more than others when investing around a date of change to the S&P 500 index. Theory and Review of Literature An important point made by Philip surrounding the announcement and change dates of additions and deletions, violate the assumptions prices. However, under this theory, the market’s historical knowledge of high abnormal positive returns for index additions and large abnormal negative returns for deletions would drive a Market Reactions to Changes in the S&P 500 Index: An Industry Analysis James Malic