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

William Elliott, Bonnie Van Ness, Mark Walker and Richard Warr

Financial Management, 2006, vol. 35, issue 4

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 ofabnormal 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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