3.1.1 Schleifer 1986 – Do Demand Curves for Stocks Slope down?
In his research on the slope of the demand curve, Schleifer (1986) studied the inclusion of firms to the S&P 500 in the period 1966-1983. In the years after 1976, inclusion of a stock in the index shows a significant increase in abnormal returns after the announcement date (AD) and a capital gain of about 3%, where most of the gain endure for at least 10 to 20 trading days after the announcement.
Schleifer (1986) also argued that most of his findings could be explained in some way by the information signaling hypothesis, stating that an inclusion of a stock into the S&P index serves as a certification of quality of the company included, thus giving a price increase. Another reason for growth in abnormal AD returns in the period after 1976 is that index funds grew massively in this period.
3.1.2 Harris & Gurel 1986 – Price and Volume Effects Associated with Changes in the S&P 500 List: New Evidence for the Existence of Price Pressures
Harris and Gurel (1986) focused their study on the changes in trading volumes arisen from the announcement of index-inclusion of a stock. Using data on S&P 500, they found that growth in trading volumes mostly comes from the period 1978-1983. This is consistent with the fact that index funds who buy large portions of AD stocks grew rapidly in the same period. In light of the no-information assertation, which assumes that any no-information associated with a
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S&P 500 listing will permanently affect prices, Harris and Gurel (1986) tests for a reversal of the price rise. The results show that there is a cumulative reversal over a 11-21-day period. These results show that little to none information about future returns is propagated by the listing announcement. Harris and Gurel (1986) concludes that the post-announcement price increase contradicts the efficient market hypothesis, and that the price-pressure hypothesis can be used as an alternative explanation to the price increase and its reversal. Harris and Gurel (1986) also tested their result by looking at deletions from the S&P 500 list. The results are consistent with the hypothesis of price-pressure. However, the results are very basic as the sample used had few observations and clustering.
3.1.3 Jain 1987 – The Effect on Stock Price of Inclusion in or Exclusion from the S&P 500
Jain (1987) tests the effects on stock price both for inclusion in the S&P 500 and exclusion from index. Where others have argued that the increase in price, post announcement, is due to a price pressure effect, Jain (1987) finds evidence that this is not correct. By using an appropriate control group compiled by various supplementary indices by S&P, he finds that stocks included in these indexes earn close to the same excess return as stocks included in the S&P 500, and therefore argues that the price-pressure hypothesis is not supported. Jain (1987) also presents evidence that exclusion from the S&P 500 list results in negative abnormal return, which is significant at the 5 per cent level.
3.1.4 Banish and Gardner 1995 – Information Costs and Liquidity Effects from Changes in the Dow Jones Industrial Average List
Banish and Gardner studies the stock price and volume effects in the Dow Jones Industrial Average List (DJIA). The study differs from previous studies done on the S&P 500. The reason is that index funds usually purchase on the S&P 500, not the DJIA, so effects shown by examining the DJIA will not likely be due to large trades by index funds. Another reason is that it is easier to examine the deletion of stock on the DJIA than on the S&P 500, since deletion on S&P 500 usually is due to mergers or bankruptcy (Banish and Gardner, 1995).
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Banish and Gardner (1965) finds that shareholders of firms that are deleted from the index experience a significant wealth loss, whereas returns from added firms are unaffected at the announcement of the change. This suggests that listings on the DJIA do not provide information on future performance, thus the Information Signaling Hypothesis is not supported. Banish and Gardner (1965) also finds no support for the price-pressure hypothesis or the imperfect substitutes hypothesis.
They do however argue that the effect can be explained by Information costs or liquidity effects. Since firms that are deleted get much less attention, their
information pool shrinks. Consequently, the price of such stocks will decrease as there is less cost associated with collecting and analyzing the stock.
3.1.5 Polonchek and Krehbiel 1994 – Price and Volume Effects Associated with the Dow Jones Average
Polonchek and Krehbiel (1994) examined the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) in the period 1962 to 1991 and found that firms added to the DJIA had positive abnormal returns and larger trading volumes on the day of inclusion, while firms added to the DJTA did not experience any abnormal returns or trading volumes. News about changes in the DJIA is certainly given more media coverage than changes in the DJTA, and according to Polonchek and Krehbiel (1994), the results are consistent with the attention theory presented by Robert Merton (1967), which stated that investors are more likely to buy stocks that are given more attention than those who are not, and that this can be an explanation to the effects of inclusion (deletion) on
indeces.
3.1.6 Bechmann 2004 – Price and Volume Effects Associated with Changes in the Danish Blue-Chip Index – The KFX Index
Bechmann (2004) studied the effects of changes in the composition of the KFX Index in Denmark. In the KFX Index, some stocks are added to or deleted from the index several times, which gives us a unique chance to observe whether it matters if the stock is added or deleted for the first time or not (Bechmann, 2004).
This is also the case for our dataset, the OSEBX, and we too will have the opportunity to study whether this is of importance. Bechmann (2004) also states
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that it is of importance to consider the characteristics of the index and the selection criterion used. The KFX index and the OSEBX are both based on publicly available information, thus, additions to the indices will not reveal any new information.
The result of the study is that stocks that are deleted from the index experience an average abnormal return of -16%, while those included experience abnormal returns of 5%, on average. Bechmann (2004) finds that the price effect is
permanent, thus supporting the price-pressure hypothesis. He also finds that firms have higher trading volumes after addition to the index, and lower trading
volumes after deletion, which can be explained by the information cost and liquidity hypothesis.