Asymmetric price responses to stock addition to and deletion from the Athens Stock Exchange Index

Abstract

Purpose The purpose of this paper is to investigate the response of investors to the announcements on the inclusion and exclusion of companies from the FTSE-ASE 20 index. Design/methodology/approach Data on the inclusion and exclusion of companies from the FTSE-ASE 20 index in the period 2000-2012 were used. The authors performed an event study analysis using a constant return model and a market model. Two different measures of aggregated abnormal returns, namely the cumulating abnormal returns and the buy-and-hold abnormal return, were used in this investigation. Findings The results suggest that the exclusion of a company from the index has a significant negative effect on stock returns. Specifically, such a stock takes more than 15 days to recover. However, for a company’s inclusion in the index, the authors observe short-lived positive reactions on stock returns. Practical implications Capital market regulators and investors should find the policy implications of this paper meaningful. Investment strategies can be implemented on the basis of the news of exclusion from the index, which can lead to higher performance for investors. As far as authorities are concerned, the decision of inclusion and exclusion to the most significant stock index in the Greek market should be carefully considered because it creates financial instability for a significant time period. Originality/value By using a battery of parametric and non-parametric econometric tests, the existence of abnormal returns of the FTSE-ASE 20 index is explored over a long time period, including the recent financial crisis.

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“…This result shows that the market reacts more to negative information, in which case the exit of the company from the Index is perceived as a negative signal of the company's inability to meet the criteria set by each Index. The results of this study are in line with research by Papachristou et al (2018) who found that the market reaction to the shares of companies that came out of the FTSE-ASE20 Index (Athens Stock Exchange) was more prominent than the company's stocks that entered the index. Specifically, Papachristou et al (2018) found that a significant negative market reaction lasted longer (longer) than a positive market reaction on companies that entered into the Index (took place in a short time).…”

“…Papachristou et al (2018) found that companies leaving the index experienced significant negative reactions and even these negative reactions lasted more than 15 days. As for the case of companies included in the index, Papachristou et al (2018) found that there is a positive market reaction but takes place in the short term. In this regard, the announcement of a change of company listings in an index is seen as a signal of confidence for investors over the prospects of the company's financial performance in the future.…”

“…Companies with lower market capitalization compared to the Index, have a higher total risk, relatively lower trading volume, and for the first time in the S&P Index tend to get a more positive reaction than companies that have the opposite character (lower level of company insecurity ). Papachristou et al (2018) tested the market reaction to the entry and exit of company shares from the FTSE-ASE 20 Index on the Athens Stock Exchange. Papachristou et al (2018) found that companies leaving the index experienced significant negative reactions and even these negative reactions lasted more than 15 days.…”

“…Papachristou et al (2018) tested the market reaction to the entry and exit of company shares from the FTSE-ASE 20 Index on the Athens Stock Exchange. Papachristou et al (2018) found that companies leaving the index experienced significant negative reactions and even these negative reactions lasted more than 15 days. As for the case of companies included in the index, Papachristou et al (2018) found that there is a positive market reaction but takes place in the short term.…”

“…Previous studies have tested the market's reaction to the announcement of the entry and exit of company shares in an index. Some researchers conducted tests on several indices for large companies such as the Nasdaq 100 Index (Yu et al, 2015), the S&P Index (Cai, 2007;Hrazdil and Scott, 2009;Jain, 1987;Elliot et al, 2006;Chen et al, 2004;Denis et al, 2003;Kamal et al, 2011;Marciniak, 2012;Marciniak and Smith, 2018), Nikkei Index (Okada et al, 2006), Dow Jones Index (Biktimirov and Xu, 2019), Athens Stock Exchange Index (ASE) (Papachristou et al, 2018), and ethical stock indexes such as Index of sustainability stock categories (Oberndorfer et al, 2013) and Indexes for Islamic stocks (Sayani and Balakrishnan, 2013;Mazouz et al, 2013;. Most of these studies generally find that the market reacts positively (negatively) to company stocks that enter (exit) on an Index.…”