The liquidity effects of revisions to the S&P 500 index: an empirical analysis |
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| Institution: | 1. Department of Finance, University of Connecticut, CT, USA;2. Department of Management, United States Coast Guard Academy, New London, CT 06320, USA;1. IBS Hyderabad, IFHE University, India;2. University of Liverpool Management School, University of Liverpool, UK;1. Montpellier Business School, Montpellier Research in Management, 2300 Avenue des Moulins, 34185 Montpellier Cedex 4, France;2. Department of Business Administration and Law, University of Calabria, 87036 Arcavacata di Rende, CS, Italy;3. School of Accounting, Economics and Finance, University of Wollongong, Wollongong, NSW, Australia |
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| Abstract: | We study liquidity effects following S&P 500 index revisions. Using a recent sample of S&P 500 additions, we find a sustained increase in the liquidity of the added stocks. Further, the improvement in the liquidity of added stocks is due primarily to a decrease in the direct cost of transacting and a smaller decline in the asymmetric information component. Finally, the event period cumulative abnormal returns for additions are significantly associated with the decrease in the effective spread, particularly the decline in the direct cost of transacting. In contrast, the liquidity of deleted stocks declines over the three months following deletion. |
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