What’s in the news? The ambiguity of the information content of index reconstitutions in Germany
Houdou Basse Mama (),
Stefan Mueller () and
Ulrich Pape ()
Additional contact information
Houdou Basse Mama: ESCP Europe Business School
Stefan Mueller: ESCP Europe Business School
Ulrich Pape: ESCP Europe Business School
Review of Quantitative Finance and Accounting, 2017, vol. 49, issue 4, 1087-1119
Abstract We analyze stock price behavior around reconstitutions of the German DAX index family from 1990 to 2013. The strong price run-up of added stocks in the 2 months preceding the announcement date remains robust until 2 months after the effective date (ED), and is fully reversed 5 months later. Conversely, stock prices of deleted firms are under pressure until 10 months after the ED. Unlike most previous studies, we find that outright entries and exits have temporary price effects, as do additions to and deletions from better-known indices; however, promotions and demotions related to lesser-known indices command permanent stock price responses. Rather surprisingly, deleted stocks consistently earn higher abnormal returns than added stocks in the 5-year post-event period. Specifically, the return differential levels out at 77.3%. We establish that this differential in permanent stock prices is attributable to differences in operating performance and media coverage. In practice, index reconstitutions do not appear to give unambiguous signals about the long-run investment appeal of affected firms. However, index fund managers not constrained by tracking error minimization would be better off holding deleted stocks for 5 years after the ED.
Keywords: DAX index family; Index reconstitutions; Long-run performance; Operating performance (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
http://link.springer.com/10.1007/s11156-017-0617-1 Abstract (text/html)
Access to full text is restricted to subscribers.
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:kap:rqfnac:v:49:y:2017:i:4:d:10.1007_s11156-017-0617-1
Ordering information: This journal article can be ordered from
Access Statistics for this article
Review of Quantitative Finance and Accounting is currently edited by Cheng-Few Lee
More articles in Review of Quantitative Finance and Accounting from Springer
Bibliographic data for series maintained by Sonal Shukla ().