S&P 500 Index reconstitutions and information asymmetry

L. C. Baran and T. H. D. King

Applied Financial Economics, 2014, vol. 24, issue 11, 777-791

Abstract: We examine the changes in information asymmetry around Standard and Poors (S&P) 500 Index additions and deletions as a possible explanation for the stock price reaction to index revision events. Using an array of information asymmetry measures to represent the complex information environment of corporations, we find a significant decrease in information asymmetry following index inclusions but show that the drop provides limited explanatory power for the announcement return. On the other hand, we find strong support for an increase in information asymmetry after deletion events, and firms with a higher level of information asymmetry prior to deletion accrue larger losses upon deletion announcements. Finally, relative to the behaviour of other firms in the S&P 500 Index, forecast error declines but forecast optimism remains consistent following index inclusions for newly added firms. This study adds to the ongoing debate over demand curves for S&P 500 Index stocks and shows that changes in information asymmetry are a significant determinant of the price reaction for newly removed firms.

Date: 2014
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DOI: 10.1080/09603107.2014.904489

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