Working Paper: NBER ID: w27593
Authors: Benjamin Bennett; Ren M. Stulz; Zexi Wang
Abstract: We investigate the impact on firms of joining the S&P 500 index from 1997 to 2017. We find that the positive announcement effect on the stock price of index inclusion has disappeared and the long-run impact of index inclusion has become negative. Inclusion worsens stock price informativeness and some aspects of governance. Compensation, investment, and financial policies change with index inclusion. For instance, payout policies of firms joining the index become more similar to the policies of their index peers. ROA falls following inclusion. There is no evidence of an impact of inclusion on competition.
Keywords: S&P 500; Index Inclusion; Passive Investing; Corporate Governance; Firm Performance
JEL Codes: G11; G14; G23; G31; G32; G35
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Joining the S&P 500 index (G12) | Negative long-term impact on shareholder wealth (G32) |
| Joining the S&P 500 index (G12) | Negative cumulative abnormal returns (CARs) in the late period (2008-2017) (G12) |
| Joining the S&P 500 index (G12) | Positive cumulative abnormal returns (CARs) in the early period (1997-2007) (G14) |
| Joining the S&P 500 index (G12) | Stock price becomes less informative (G14) |
| Joining the S&P 500 index (G12) | Reduced investment efficiency due to passive investors' behavior (G41) |
| Joining the S&P 500 index (G12) | Reduction in return on assets (ROA) by 16 percentage points (G32) |
| Joining the S&P 500 index (G12) | Decrease in blockholder ownership (G34) |
| Joining the S&P 500 index (G12) | Shift in governance dynamics leading to increased management power (H11) |
| Joining the S&P 500 index (G12) | Reduced monitoring (E63) |
| Joining the S&P 500 index (G12) | Payout policies become more aligned with index peers (G35) |
| Joining the S&P 500 index (G12) | No adverse impact on competition among firms in the index (L49) |