For those whose financial portfolios include investments in low-cost index funds, most assume that companies benefit from inclusion in the leading indexes, such as the S&P 500. As a recent paper, Does Joining the S&P 500 Index Hurt Firms?, by Benjamin Bennett (Tulane) et al., notes, being added to the index is like "joining a prestigious club. A firm gains prestige by joining the club, but at the cost of becoming compared to other firms in the club."
To better assess the costs and benefits, the paper executes "difference-in-differences (DiD) analyses based on S&P 500 index addition. Specifically, we first identify all S&P 500 additions in our sample period. Added firms are our treated firms. For each treated firm, we search for a control firm that is never a member of the S&P 500 index in our sample period and use a propensity-score match on total assets, Tobin’s q, stock return, and 2-digit SIC industry (exact match) in the year before a treated firm is added to the index, so that the matching process is not affected by index additions." The main findings are summarized in the paper's abstract.
“We investigate the impact on firms of joining the S&P 500 index from 1997 to 2017. We find that the positive announcement effect on the stock price of index inclusion has disappeared and the long-run impact of index inclusion has become negative. Inclusion worsens stock price informativeness and some aspects of governance. Compensation, investment, and financial policies change with index inclusion. For instance, payout policies of firms joining the index become more similar to the policies of their index peers. ROA falls following inclusion. There is no evidence of an impact of inclusion on competition.”
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