Abstract

This paper investigates the markets' capacity to identify the companies that are candidates for addition to the Standard and Poor's 500 Index. A sample of firms likely to be added to the S&P 500 are identified on a date on which the market can anticipate that an S&P 500 member will be removed from the Index and be replaced by another firm. It is referred to as the anticipation date. Specifically, the anticipation date is the date on which the market is certain that the company in question will be removed from the Index. The sample of actual additions is assumed to be the set of potential additions to the Index, and their stock price behaviour is studied on the anticipation date. The objective is to determine if the market incorporates the likelihood of these firms being added to the S&P 500 Index, given that a change in the Index composition is certain in the near future. No evidence of a price reaction is found on the anticipation date, indicating that the market does not identify the potential additions to the Index. Particular emphasis is placed on examining the abnormal price reaction of a sample of additions that originated from the S&P 400 MidCap Index.