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Information Costs and Liquidity Effects from Changes in the Dow Jones Industrial Average List

Published online by Cambridge University Press:  06 April 2009

Messod D. Beneish
Affiliation:
Fuqua School of Business, Duke University, Durham, NC 27708
John C. Gardner
Affiliation:
School of Management, State University of New York at Binghamton, Binghamton, NY 13901

Abstract

We examine the stock market effect of changes in the composition of the Dow Jones Industrial Average (DJIA). Unlike S&P 500 listing studies, we find that the price and the trading volume of newly listed DJIA firms are unaffected. We attribute this result to a lack of index fund rebalancing, since index trading is limited for most of our sample period and index funds mimic the S&P 500, not the DJIA. Firms removed from the index, however, experience significant price declines. We consider information signaling, price pressure, imperfect substitutes, and information cost/liquidity explanations for these asymmetric findings. The evidence is consistent with the information cost/liquidity explanation, which holds that investors demand a premium for higher trading costs and for holding securities that have relatively less available information.

Type
Research Article
Copyright
Copyright © School of Business Administration, University of Washington 1995

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