Gaming the FTSE 100 index |
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| Institution: | 1. University of Edinburgh Business School, 29 Buccleuch Place, Edinburgh, EH8 9JS, UK;2. School of Management and Languages, Heriot-Watt University, Riccarton, Edinburgh, EH14 4AS, UK;1. School of Management (Emeritus), University of St Andrews, UK;2. Lytham St Annes, UK;1. University of Southampton, UK;2. The Open University, UK;3. University of South Australia, Australia;4. University of Dundee, UK;1. Royal Holloway, University of London, United Kingdom;2. University of Sydney, Australia;3. Lancaster University, United Kingdom;1. Emeritus Professor of Finance at University of Exeter, United Kingdom;2. University of Reading, United Kingdom;3. Xfi Centre, University of Exeter Business School, United Kingdom;1. Bangor Business School, University of Bangor, Bangor, Gwynedd, LL57 2DG, UK;2. Hull University Business School, University of Hull, Hull, HU6 7RX, UK |
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| Abstract: | In the UK (unlike the US and many other countries), companies enter and exit the main stock market index (FTSE 100) according to a clear set of rules based on market capitalisation. This creates an opportunity to game the system to secure or retain FTSE membership by manipulating capitalisation. There is considerable evidence in extant studies that index membership is beneficial, both for shareholders and managers. Hence, companies may adopt financial strategies designed to acquire or retain membership. We investigate two types of gaming. We define strategic gaming as a situation in which companies, which may initially be a number of places away from the boundary, make abnormal share issues cumulatively over several quarters. We find strong supportive evidence for this. For tactical gaming, which would involve companies in the very closest proximity to the boundary, we do not. Our analysis shows that gaming is limited to companies outside the index trying to get in. Companies that are close to exit do not game to retain their index place. The high natural volatility of market capitalisation makes success of gaming uncertain. Our central estimate is that about 5% of entries to the index appear to be the result of gaming. |
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| Keywords: | Index game Index effect FTSE 100 Stock market index Additions and deletions |
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