Do Demand Curves for Small Stocks Slope Down?

Abstract

Stocks added to the S&P 500 generally experience positive abnormal returns following the announcement. Several competing explanations exist for this reaction, but small sample sizes and other issues make it difficult to distinguish among them. We examine this subject using the small-cap Russell 2000 index, which has several advantages over the S&P 500 in this context. Our primary finding is that stocks added to or deleted from the Russell 2000 experience significant changes in stock price and trading volume, but the effect is transitory. The results support the price pressure hypothesis. 2004 The Southern Finance Association and the Southwestern Finance Association.

The Impact Of Index Migrations On Share Prices: Evidence From The Johannesburg Stock Exchange

“…This consideration should be especially relevant to relatively concentrated indices such as the JSE Top 40 and the SWIX 40. 3 Mase (2007) makes a similar argument for the FTSE100, and confirms this by demonstrating that for the FTSE100 the index migration price effects are similar for first-time and returning index constituents. Unfortunately there are not yet enough instances of index re-entries on the JSE to make a similar analysis meaningful.…”

“…2) If so, what are the time-dependent profiles of such CARs (in other words, to what extent does the market discount the probability of an index change in advance)? 3) If CARs are observed, are they permanent, or is this a process that reverses itself within a relatively short period of time post-index additions or deletions?…”

“…In contrast to larger indices such as the S&P500, the JSE's Top 40 Index is constructed within a relatively concentrated market, and the pool of candidate companies for this index is fairly small, implying that they should already be well monitored regardless of whether they are in or out of the index. 3 Shleifer (1986) suggests that sudden increases in demand caused by index fund buying is responsible for observed abnormal returns earned by shares promoted to the S&P500, and Beneish & Gardner (1995) attribute their finding of a lack of a similar effect for the Dow Jones Industrial Average (DJIA) to the latter not generally being tracked by index funds. Under this hypothesis, demand curves for shares are downward sloping, and the change in demand causes a shift in the demand curve that leads to a permanent price increase 4 .…”

Abnormal Stock Returns and Volume Activity Surrounding Lodging Firms' CEO Transition Announcements

“…Abnormal trading volume is generally calculated using the log-transformed percentage of shares outstanding for each security as compared with an estimated market model abnormal trading volume (Ajinkya and Jain, 1989;Cready and Ramanan, 1991;Biktimirov et al, 2004). As with price event studies, both parametric and nonparametric tests are indicated and the same tests utilized for abnormal price returns were used for the abnormal volume returns (Campbell and Wasley, 1996).…”

Index revisions, systematic liquidity risk and the cost of equity capital

“…However, they do not find any change in the median number of individual shareholders following deletions. Rigamonti and Barontini (2000), Shu et al (2004) and Biktimirov et al (2004) show that institutional ownership increases following additions to the Mib30, Taiwanese market (MSCI) and Russell 2000 indices, respectively.…”