Demand Curves for Stocks Do Slope Down: New Evidence from an Index Weights Adjustment


  • Aditya Kaul,

  • Vikas Mehrotra,

  • Randall Morck

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    • All authors are at the University of Alberta. We thank Ron Daniels, Jarrad Harford, Mark Huson, Jeff MacIntosh, Wayne Mikkelson, Barry Scholnick, Jay Shanken, Andrei Shleifer, Andrew Siegel, Paul Spindt, René Stulz (the editor), Harry Turtle, and seminar participants at the University of Alberta, the EFMA, the EFA, and the NFA meetings for helpful comments. We are especially grateful to an anonymous referee for many insightful suggestions. We also thank Lou Hollinger for clarifying several legal issues, James McVicar and Paul D'Souza of the Ontario Securities Commission for answering queries about filing requirements, Lori Bak of Benefits Canada for providing statistics on indexing in Canada, John Kaszel of IFIC for providing index fund information, and William MacKenzie for providing ownership data for non-TSE firms. We retain responsibility for any remaining errors. Aditya Kaul acknowledges financial support from the Pearson fellowship at the University of Alberta's Faculty of Business.


Weights in the Toronto Stock Exchange 300 index are determined by the market values of the included stocks' public floats. In November 1996, the exchange implemented a previously announced revision of its definition of the public float. This revision, which increased the floats and the index weights of 31 stocks, conveyed no information and had no effect on the legal duties of shareholders. Affected stocks experienced statistically significant excess returns of 2.3 percent during the event week, and no price reversal occurred as trading volume returned to normal levels. These findings support downward sloping demand curves for stocks.