Investor awareness and the long-term impact of FTSE 100 index redefinitions

Abstract

This study finds an asymmetric long-run abnormal return performance following stocks’ inclusion in or deletion from the FTSE 100 Index. This asymmetry suggests that investors’ awareness of stocks is influenced by index changes. These results extend those documented by Chen et al . (2004) for the S&P 500.

Notes

¹ Additional studies focusing on alternative indexes have obtained similar results. See Beneish and Gardner (1995) and Greenwood (2005). See also Kaul et al . (2000) for an analysis of the impact of index re-weightings.

² Merton (1987, p. 497) notes ‘One would thus expect that important cross-sectional differences among securities’ expected returns from factors other than market risk, will tend to be concentrated among lesser-known stocks with small investor bases.

³ See, for example, Vijh (1999) and Desai and Jain (1999).

⁴ The use of this test statistic was proposed by Lyon et al . (1999).

⁵ The alternative resample sizes do not influence the results.

⁶ See Jegadeesh and Titman (1993) and Rouwenhorst (1998).