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S&P 500 Index Additions and Earnings Expectations

Authors

  • Diane K. Denis,

  • John J. McConnell,

  • Alexei V. Ovtchinnikov,

  • Yun Yu

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    • Denis, McConnell, and Ovtchinnikov are from Purdue University. Yu is from Wescott Financial Advisory Group LLC. Analyst forecast data were provided by the Institutional Brokers' Estimate System (I/B/E/S), a service of Thomson Financial, as part of a broad academic program to encourage earnings expectations research. Any errors are our own.


Abstract

Stock price increases associated with addition to the S&P 500 Index have been interpreted as evidence that demand curves for stocks slope downward. A key premise underlying this interpretation is that Index inclusion provides no new information about companies' future prospects. We examine this premise by analyzing analysts' earnings per share (eps) forecasts around Index inclusion and by comparing postinclusion realized earnings to preinclusion forecasts. Relative to benchmark companies, companies newly added to the Index experience significant increases in eps forecasts and significant improvements in realized earnings. These results indicate that S&P Index inclusion is not an information-free event.

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