RT Journal Article
SR Electronic
T1 The S&P 500 Effect
JF The Journal of Investing
FD Institutional Investor Journals
SP 62
OP 73
DO 10.3905/joi.2003.319569
VO 12
IS 4
A1 Daniel Cooper
A1 Geoffrey Woglom
YR 2003
UL https://pm-research.com/content/12/4/62.abstract
AB This is an analysis of the effect on a company's stock price of adding it to the S&P 500 index. A simple theoretical model is developed to show how trading effects and changes to fundamentals should affect the price of S&P 500 additions upon announcement and in the long run. The model predicts a company added to the S&P 500 should experience an initial price increase and then a reversal of this price increase, owing to the predicted increased stock price volatility of companies post-addition. All these effects should strengthen over time with the increasing importance of S&P 500 indexed mutual funds. Tests of the model using a sample of 303 S&P 500 index additions between 1978 and 1998 produce generally consistent with predictions, particularly in the most recent period, when it appears that a post-addition increase in stock price volatility reverses almost all the initial price increase.