Information content of changes in index composition

Abstract

This study examines the effect of changes in the Korea Stock Exchange Price Index to determine the main cause of abnormal return behavior. It tests five prevailing hypotheses individually and simultaneously using both added and deleted stocks during the event window. We find evidence of permanent price effects and of temporary price pressure around the effective date. The results show that the return behavior of added and deleted stocks can be explained by the information content hypothesis. The indexing methodology conveys the valuable information that the added stocks showed good performance and better earnings relative to both the market and the sameindustry average while the deleted stocks showed the opposite. In conclusion, member changes in the Korea Stock Exchange Price Index are not information-free events. © 2011 Korean Securities Association.