Firm performance following S&P 500 additions

The purpose of the present study is to investigate whether information can partly explain the price increases associated with the S&P 500 Index additions. We examine the earnings performance of newly added firms for the period after additions. Firms newly added to the S&P Index do not exhibit an improvement in ROAs relative to their pre-addition ROAs. However, these firms exhibit a less-pronounced reversion to the mean than a performance-matched control sample. Moreover, analysis of the Value Line forecast implies that market participants adjust their expectations of the future earnings upwards in response to the S&P 500 addition announcement. Analysis on the number of analysts following and the amount of institutional holdings indicates that there is evidence of increased outside monitoring after additions. In summary, the results in this study are consistent with the notion that S&P 500 additions are associated with favorable information about firms' future earnings. The increased earnings might results from the increased market monitoring. In this sense, we say that S&P 500 addition is an information event.