Market Reaction to Addition of Indian Stocks to the MSCI Index

As globalization of the Indian bourses continue, the role of international stock indices in Indian markets is likely to become more prominent. This paper studies the effect that the inclusion of Indian firms in an international stock index has on their price and traded volume. An empirical analysis of market reaction to addition of stocks to a widely followed international index - the MSCI India Standard Index - reveals that such additions are associated with a significant and permanent rise upon announcement of the addition with no corresponding rise in volumes traded in those stocks. It appears that the quot;information effectquot; - the view that membership in a major stock index signals positive information about the company in question - is most likely to be the driver behind this quot;announcement effectquot;. This suggests that membership of an international index is perceived as a positive signal by the market