Abstract
We consider recent data from three major US indices (S & P500, NASDAQ 100, and DJIA) to examine the effect of joiners and leavers on stock market returns and volatility. We report (a) a positive effect of leavers on stock market returns (S & P500, DJIA), (b) a positive effect of leavers on stock market volatility (S & P500), and (c) a negative effect of joiners on DJIA stock market returns and volatility. No effects reported for NASDAQ100. We compare these results with the profitability, P/E and Price to Book index ratios. These findings are recommended to financial managers and investors dealing with US stock indices.
Highlights
The literature views the size of the stock market as a measure of financial development [1]
We have some evidence about the effect of listing and delisting announcements on stock returns, we know little about these effects on volatility
Our aim is to extend previous papers by testing two hypotheses: 1) the effect of joiners/leavers results on stock market returns and volatility of three major US indices; and 2) if the asymmetric effect is present in our case
Summary
The literature views the size of the stock market as a measure of financial development [1]. Stock markets provide several benefits as a source of external capital by reducing asymmetric information. Other benefits include low cost of capital and innovation in firms; see Acharya and Xu [2]. They report that firms in more innovation intensive industries with a greater need for external capital are more likely to go public. Pour et al [4] show that, during the first two years of listing, leverage of delisted firms increased, but their profitability and equity market value decreased, while their market to book remained constant. Firms with significant free cash flows as well as low growth opportunities are more likely to go private [4]. Firms trade off the costs and benefits of being listed (joined) in the stock market when they decide to delist (leave), see Pour et al [4]. The reasons behind the listing/delisting decision remain an open research question
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