The purpose of this paper is to directly examine the information hypothesis of S&P 500 index inclusion announcements by investigating the degree to which information beyond Standard & Poor's eight stated criteria enters the inclusion decision.
Isolating a sample of S&P 500 additions and their eligible candidates during 1987‐2004, this paper employs logistic analysis that identifies factors ex post beyond the stated criteria that help distinguish the type of information that influences the final selection decision and that is arguably priced at the inclusion announcements.
The evidence indicates that, when choosing among new S&P 500 candidates, the S&P's committee relies primarily on publicly available information related to enterprise risk and historical performance. Material, private insight into future value‐relevant information plays at most a small part in the selection.
The results suggest that index additions convey limited new information about added firms. Studies analysing index additions should start with the presumption that index inclusion announcements are information‐free events, and focus on the consequences of index inclusions such as liquidity, awareness or arbitrage risk, in their relation to index premia.
The results indicate that the previous evidence supporting the information hypothesis using the S&P 500 inclusions is not compelling.
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