PRICE AND VOLUME EFFECTS ASSOCIATED WITH THE CREATION OF STANDARD & POOR'S MIDCAP INDEX

Abstract

AbstractIn this paper we explore price and volume effects associated with the 1991 creation of Standard & Poor's MidCap 400 index. Prior work on changes in the composition of existing indices finds a significant price response to the announcement. Various authors link the effect to price pressure, information, an outwardly shifting demand curve for securities, and the increased attention that comes with inclusion in an index. Using event study methodology, we find significant price and volume effects during the two weeks leading up to the Standard & Poor's announcement, but no significant effect in the two‐day interval around the event. Apparently, information leakage and/or anticipation preceded the creation of the index. The price run‐up is permanent since the positive abnormal returns leading up through the announcement are not associated with significantly negative abnormal returns after the announcement. In addition, MidCap stocks significantly outperform the market during the fifty‐two weeks following the announcement. Using cross‐sectional regressions, we show that these prior‐period abnormal returns are positively related to abnormal volume and institutional holdings. We also find that firms trading over‐the‐counter had larger price run‐ups than NYSE or AMEX firms.