The purpose of this paper is to examine the shocks to firm's beta around the event of addition or deletion from the S&P 500 index.
The total derivative of beta and Campbell and Vuolteenaho decomposition of beta methodologies are used, on monthly and daily basis, to examine the behavior of beta around the event.
Results show a significant increase in correlations of the event firms' returns and the market proxy returns and cash‐flow betas, and decrease in discount‐rate betas for added firms and the opposite effects for deleted firms. Robustness tests indicate that the total derivative changes effects are typical for the event firms industry but that the cash‐flow correlation changes are specific to the firm. These findings suggest that addition or deletion from the S&P 500 index is not an information free event.
The Campbell and Vuolteenaho methodology has limitations – it is conditional on the selection of state variables. In future research it would be beneficial to use different state variables in the beta decomposition framework. Another relevant question for a future research is: what are the effects of the event on the Fama‐French factor model loadings?
The paper's findings contribute to the ongoing debate in the literature of the information hypothesis for addition or deletion from the S&P 500 index.
Geppert, J.M., Ivanov, S.I. and Karels, G.V. (2011), "An examination of the information content of S&P 500 index changes: Analysis of systematic risk", Review of Accounting and Finance, Vol. 10 No. 4, pp. 411-426. https://doi.org/10.1108/14757701111185353
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