Cost of Equity and S&P 500 Index Revisions |
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| Authors: | Lindsay Baran Tao‐Hsien Dolly King |
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| Institution: | Lindsay C. Baran is an Assistant Professor at Kent State University in Kent, OH. Tao‐Hsien Dolly King is the Rush S. Dickson Professor of Finance at the University of North Carolina at Charlotte in Charlotte, NC. |
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| Abstract: | We examine how the cost of equity changes when firms are added to or removed from the S&P 500 Index during index revisions. Newly added firms experience a significant decline in the cost of equity, while recently removed firms show a significant increase. Liquidity improves for addition firms and declines for removed firms. Addition firms also experience a decline in shadow cost. Changes in cost of equity for included firms are explained by changes in liquidity, shadow cost, and firm size. Finally, included firms with greater investment opportunities benefit more from the reduction in cost of capital. |
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