What Drives the S&P 500 Inclusion Effect? An Analytical Survey

William Elliott, Bonnie F. Van Ness, Mark D. Walker and Richard S. Warr

Financial Management, 2006, vol. 35, issue 4, 31-48

Abstract: We present an analytical survey of the explanations—price pressure, downward‐sloping demand curves, improved liquidity, improved operating performance, and increased investor awareness—for the increase in stock value associated with inclusion in the S&P 500 Index. We find that increased investor awareness is the primary factor behind the cross‐section of abnormal announcement returns. We also find some evidence of temporary price pressure around the inclusion date. We find no evidence that long‐run downward‐sloping demand curves for stocks, anticipated improvements in operating performance, or increased liquidity are related to the cross‐section of announcement or inclusion returns.

Date: 2006
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