Article2012

Cost of Equity and S&P 500 Index Revisions

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Financial Markets and Investment Strategies Corporate Finance and Governance Financial Analysis and Corporate Governance

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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References

1997On Persistence in Mutual Fund Performance 2002Illiquidity and stock returns: cross-section and time-series effects 1995What Do We Know about Capital Structure? Some Evidence from International Data 1987A Simple Model of Capital Market Equilibrium with Incomplete Information 1986Asset pricing and the bid-ask spread 2008Asset Growth and the Cross‐Section of Stock Returns 1986Do Demand Curves for Stocks Slope Down?1986Price and Volume Effects Associated with Changes in the S&P 500 List: New Evidence for the Existence of Price Pressures

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