Abstract
We find that the firms included in the S&P 500 index are characterized by large increases in earnings, appreciation in market value and positive price momentum in the period preceding their index inclusion. This strong pre-inclusion performance predicts (1) the permanent increase of market value and (2) the change in return comovement, reflected in declines of size, value and momentum betas, following index inclusion. Non-event firms with similar performance experience similar appreciation in value and changes in comovement coincident with the event firms. Contrary to the consensus in the literature, our results indicate that – after accounting for the firms’ extraordinary pre-inclusion performance – index inclusion has no permanent effect on value and comovement.
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