Pricing Efficiency and Bounded Rationality : Evidence Based on the Responses Surrounding GICS Real Estate Category Creation

We use the reclassification of the real estate stocks in the S&P 500 from the Financials sector as a natural experiment to test the co-existence of both market force and behavioural biases. By performing event studies on REITs included in S&P 400, S&P 500, and S&P 600 indices on both the announcement and the implementation dates, we investigate the impact of the reclassification of the real estate stocks in the S&P 500 from the Financials sector to the newly created Real Estate sector under GICS system. We set up four hypotheses to test if the identified reclassification effect is due to improved pricing efficiency or bounded rationality. The event studies confirm the presence of abnormal returns during the announcement of the new sector and the S&P implementation. The reclassification effect is the largest for the large-cap real estate stocks that are included in the S&P 500 index. These abnormal returns are robust to various measures of statistical significance and variation of event windows. The creation of the real estate category in GICS both improve the pricing efficiency of real estate stocks, but also triggered framing effects among investors. The market is under the influence of both the rational and the irrational forces