Regression Discontinuity and the Price Effects of Stock Market Indexing

Abstract

and the Swedish Institute for Finance Research for very helpful comments. We also thank Russell Investments for providing data and He Ai for her research assistance. The internet appendix is available online at http://www.princeton.edu/~hhong/rd2000appendix NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Governance and Taxes: Evidence from Regression Discontinuity (Retracted)

“…Thus, the conditions for instrument validity must be satisfied. We observe relevance in Figure 1, which plots the discontinuity in institu- Russell 1000 (Chang et al [2015]). Second, Russell indexes are value-weighted, meaning that a firm just-included from the Russell 1000 index will have a much lower index weight than a firm just-excluded from the Russell 1000 index.…”

“…Among firms just-excluded from the Russell 1000 index, total institutional ownership increases by 10%. This is not particularly surprising given the prevalence of benchmarking investment performance against indexes, and, in particular, the greater institutional following of the Russell 2000 index relative to the Russell 1000 index, as documented by Chang et al [2015]. Furthermore, because the Russell indexes are value-weighted, the index weight applied to firms at the top of the Russell 2000 index have a much larger weight in that index than firms at the bottom of the Russell 1000 index (Chang et al [2015]).…”

“…This is not particularly surprising given the prevalence of benchmarking investment performance against indexes, and, in particular, the greater institutional following of the Russell 2000 index relative to the Russell 1000 index, as documented by Chang et al [2015]. Furthermore, because the Russell indexes are value-weighted, the index weight applied to firms at the top of the Russell 2000 index have a much larger weight in that index than firms at the bottom of the Russell 1000 index (Chang et al [2015]). Mullins [2014] provides further evidence that other blockholders, including insiders and outsiders, are not displaced by these new institutional owners, which implies that retail investors, the group least likely to exert monitoring effort in governance, are the displaced shareholders.…”

“…Whereas we use the Russell 1000/2000 threshold to study the tax preferences of institutional investors, other recent papers have used the Russell 1000/2000 threshold to analyze the price effects of index reconstitutions (Chang et al [2015]), the monitoring effects of index portfolio weights (Fich et al [2015]), the market liquidity effects of index reconstitutions (Boone and White [2015]), the institutional ownership impact on payout (Crane et al [2014]), the quantity and quality of corporate disclosures (Bird and Karolyi [2015]), and CEO compensation (Mullins [2014]), as well as the effect of passive investors on governance events (Appel et al [2015]). Crane et al [2014], we find that firms just-added to the Russell 2000 index experience a 10% increase in institutional ownership.…”

An Improved Method to Predict Assignment of Stocks into Russell Indexes

“…Reiterating a claim in Chang, Hong, andLiskovich (2015, p. 222), Wei andYoung (2017) argue that using end-of-June weights to construct a proxy for the original ranking variable generates selection bias. Indeed, these authors show that some relevant variables (including institutional ownership itself) display a pre-existing discontinuity at the cutoff when the June rankings are used (for more details, see also Appel, Gormley, and Keim (2019b)).…”