Does the S&P index effect differ between large and small company stocks?

Ernest N. Biktimirov and Yuanbin Xu

International Journal of Managerial Finance, 2023, vol. 20, issue 2, 457-478

Abstract: Purpose - The purpose of this study is to compare market reactions to the change in the demand by index funds between large and small company stocks by examining the transition of the S&P 500, S&P 400 MidCap and S&P 600 SmallCap indexes from market capitalization to free-float weighting. This unique information-free event allows not only avoiding confounding information signaling and investor awareness effects but also comparing the effect of the decrease in demand on stocks of different sizes. Design/methodology/approach - This study uses the event study methodology to calculate abnormal returns and trading volume around the full-float adjustment day. It also tests for significant changes in institutional ownership and liquidity. Multivariate regressions are used to examine the relation of liquidity changes and price elasticity of demand to the cumulative abnormal returns around the full-float adjustment day. Findings - This study finds significant decreases in stock price accompanied with significant increases in trading volume on the full-float adjustment day, and significant gains in quasi-indexer institutional ownership and liquidity. The main finding is that cumulative abnormal returns around the event period are related to changes in the number of quasi-indexer and transient institutional shareholders, not to changes in liquidity or price elasticity of demand. Originality/value - This study provides the first comprehensive comparison analysis of stock market reactions to the decline in demand between large and small company stocks. As an important implication for future studies of the index effect, changes in institutional ownership should be considered in the analysis.

Keywords: Abnormal returns; Demand curve; Event study; Index effect; Institutional ownership; Stock liquidity (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijmfpp:ijmf-11-2022-0506

DOI: 10.1108/IJMF-11-2022-0506

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