Abstract
Our purpose is to extend the reconstitution literature by considering short interest activity and shareholder wealth effects around the rebalancing of the Russell 2000 index. For index additions, we find an inverse relationship in the reconstitution period, suggesting a dominant price pressure effect, and a direct relationship post-reconstitution, suggesting that short interest liquidity benefits dominate. For index deletions, our evidence suggests there are permanent negative wealth effects and persistent increases in short interest surrounding index reconstitutions, consistent with the imperfect substitutes hypothesis. Overall, our results show that short interest is an influential factor in the wealth effects of Russell 2000 index reconstitutions.
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