Stepping stone or stumbling block? The effect of stock index inclusions on firm performance

ABSTRACT

China’s stock market has many stock indexes that provide performance benchmarks of listed companies. Employing the staggered difference-in-differences (DID) method, this study examines the effect of inclusions in stock index on firm operation and performance. We confirm that inclusions in the CSI 500 significantly decrease firm performance and the results are robust across several tests. We provide direct evidence of a channel through which inclusion affects firm performance; specifically, we find that stock price informativeness experiences a significant decrease after inclusion in an index. Further, we find that the effect of stock index inclusions is also significant for firms in developed markets. Overall, these results shed light on the effect of stock index inclusions on a firm’s real operation.

KEYWORDS:

• Stock index
• firm performance
• stock price informativeness
• corporate governance

JEL CLASSIFICATION:

• G14
• G30
• G34

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ More information about index system is on the website: http://www.csindex.com.cn/.

Additional information

Funding

This research is supported by the National Natural Science Foundation of China (No. 71721001; 71991474).