Price effects associated with changes in the S&P 500's composition: The removal and replacement of seven non-US companies

Abstract

This dissertation examines price effects associated with additions and deletions to the Standard and Poor's (SP) 500 index. The results are by and large consistent with those found in previous studies such as Beneish and Whaley (1996; 2002), Lynch and Mendenhall (1997), and Harris and Gurel (1986). That is, firms which are added to the Index experience positive price effects and firms that are deleted experience negative price effects. The price adjustments in this study exhibit short-run patterns that appear on the surface to be inconsistent with market inefficiency. However, the existence of structural impediments in the price adjustments does not necessarily imply that abnormal returns are there for the picking. This dissertation concludes by discussing investor psychology and how it complicates the process of trying to create trading strategies to gain excess returns on the observed price effects.