The Effect of Additions to Index on Stock Prices

This study examines the impact of inclusion of stocks in the stock indices on their market prices. Constituent stocks of stock indices are commonly believed to be ace performers of the industry to which they belong in specific and all the non-index stocks in general. The study uses S&P CNX Nifty as the index under consideration and event study methodology to examine the said impact. In contrast to most of the existing research, this study finds that stocks that are added to the index experience significant positive abnormal returns on and following their date of inclusion, which could be attributed to increased demand for such stocks arising out of portfolio restructuring of the index funds. The results of this study pose to build on the importance of the impact of stocks’ inclusion in the index on their prices in future event studies.