Inclusion in or exclusion from a major stock index can affect a company’s share price, but the effects are temporary. Partner Tim Koller and coauthors analyzed hundreds of companies that were added to or removed from the S&P 500 over the history of the index and found that a company’s stock price returns to its intrinsic value within two months of the inclusion or removal. Shareholder returns drive index inclusion or exclusion, not the other way around, they say.
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A pair of line graphs show how an announcement of a stock’s exclusion or inclusion in the S&P 500 affects the excess TSR of individual stocks. Each graph uses an index set 35 trading days before and after the S&P reset event. The average and median stocks gain in the case of S&P 500 inclusion and lose in the case of S&P 500 exclusion. But for both inclusion and exclusion, they return close to their previous values within 35 trading days after the event. Source: Corporate Performance Analytics by McKinsey.
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To read the article, see “The myth of an enduring index premium,” May 31, 2024.