Asymmetric responses to stock index reconstitutions: Evidence from the CSI 300 index additions and deletions

Wei-Kuang Chen and Ching-Ting Lin

Pacific-Basin Finance Journal, 2016, vol. 40, issue PA, 36-48

Abstract: This study investigates constituent changes to the CSI 300 index, which is scheduled semiannually in accordance with clearly-stated selection methodology. We find that stocks experience a permanent price increase and receive optimistic EPS forecasts from analysts following their addition to the index. These optimistic earnings expectations are supported by increased capital-raising activities and capital expenditure. Conversely, we do not find any significant results for index deletions. Evidence in the form of changes in the number of shareholders and shadow costs are consistent with the investor awareness theory. Increased investor awareness and monitoring forces newly-added firms to perform effectively, resulting in the attraction of more newly-issued capital from investors due to the firms' lower cost of capital. Monitoring and performance effectiveness, however, would not lessen sharply for deletions.

Keywords: CSI 300 index; Stock index reconstitution; Investor awareness; Analyst EPS forecast; Capital expenditure; Asymmetric market response (search for similar items in EconPapers)
JEL-codes: G12 G14 G20 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:40:y:2016:i:pa:p:36-48

DOI: 10.1016/j.pacfin.2016.08.005

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