Summary for Regular Reconstitutions

We observe unexpected significantly positive abnormal returns on AD1 for regular deletions,

which could be caused by the confounding events based on our further analysis. Ignoring AD1

and AD2, we observe significant increases (decreases) on the actual announcement date (AD3),

and the insignificant price effects on the effective date for regular index reconstitutions based on the full sample analysis. We also differentiate securities by the S&P 500 Index membership, the insignificant results could be driven by the small sample size. Similar insignificant results are found for the international securities, and we cannot make a strong conclusion based on the small sample size. In light of the cumulative abnormal return over the period from AD3 to ED+40, all

groups, except regular additions that are members of the S&P 500 Index, show insignificance, and hence, the results are consistent with the price pressure hypothesis.

30 5.4 Irregular Additions

5.4.1 Full sample of irregular additions

Table 10 summarizes results for the full sample of irregular additions. As shown in Panel A, these firms, on average, experience a significantly positive gain of 1.11% on the announcement date. However, the announcement date effects are fully reversed on ED+1. The cumulative abnormal return over the period from the AD to ED+40 is insignificant, suggesting the absence of a permanent effect.

The market model abnormal returns suggest similar results, as seen in Panel B. These firms experience 1.28% and 1.73% on AD and AD+1. On ED, these firms gain an extra 1%. The price reversal starts on ED+1, which is a significantly negative 1.37%. The cumulative abnormal returns over the subsequent period from AD to ED+40 are not significantly different from zero, which is consistent with the results from market-adjusted abnormal returns.

5.4.2 Irregular additions that are members of the S&P 500 index

Results for irregular additions that are members of the S&P 500 Index are shown in Table 11. Though the sample size consists of only 4 stocks, an interesting observation is still worth

discussing. These firms experience significant increases on the effective date by using both measurements. Recall that we observe significant market responses on neither three

announcement dates nor the effective date for regular additions (deletions) that are members of the S&P 500 Index. A possible explanation is that irregular additions are not predictable, and thus there may not be enough arbitraging trades to offset the trades made by institutional shareholders on the effective date. Instead, quasi-arbitragers are more prepared for the regular Nasdaq-100 Index reconstitutions, so we do not observe any significant abnormal returns for regular additions (deletions).

5.4.3 Irregular additions that are not members of the S&P 500 index and are domestic securities Table 12 summarizes results for irregular additions that are not members of the S&P 500 Index and are domestic securities. As seen in Panel A, these firms, on average, gain 2.34% on AD+1. The price effects start reversing on ED+1. The cumulative abnormal return over the period from AD to ED+40 is insignificant.

31 Turning to the results from the market model abnormal returns, these firms experience a significant increase of 1.09% on the announcement date, and an additional gain of 2.51% between AD+1 and ED-1. On ED+1, the announcement date effects partially reverse, and these firms lose 1.38%. The cumulative abnormal return over the period following the reconstitutions is insignificant.

5.4.4 Irregular additions that are not members of the S&P 500 index and are international securities

Results for irregular additions that are not members of the S&P 500 Index and are

international securities are reported in Table 13. Insignificantly positive abnormal returns are observed on AD and ED based on both measurements. According to the market-adjusted

abnormal returns, these firms lose 6.21% between AD+1 and ED-1. However, the sample size of only 8 firms is too small to make any strong conclusion.

5.4.5 Summary

For full sample analysis, we observe significant average abnormal return on the

announcement date, and the price effects fully reversed one trading day after the effective date. The securities that are not members of the S&P 500 Index and are domestic securities display the similar trend. Securities that are members of the S&P 500 Index experience significant return only on the effective date. We assume that arbitragers are not well prepared for the unpredictable irregular reconstitutions; however, the sample size is too small for making a strong conclusion. The international securities do not show significant market response on each trading day, which could be driven by the small sample size. The absence of permanent price effects for all four groups is consistent with the price pressure hypothesis.

5.5 Conclusions

The regular additions generally do not display significant increase on AD1 or AD2, while the

regular deletions primarily experience unexpected significantly positive returns on AD1 because

32 announcement date for regular index reconstitutions. Hence, the regular index reconstitutions may not be fully predictable.

For both regular and irregular index reconstitutions, securities added to or removed from the Nasdaq-100 index display strong market reactions on the actual announcement date and the price effects are fully reversed within 40 days after the effective date. Though we normally observe insignificant price effects on the event dates for securities that are members of the S&P 500 Index, the results could be driven by small sample size. Additionally, we cannot make a strong conclusion for international securities because of small sample size.

We observe symmetric and temporary price effects for regular additions and regular

deletions, and temporary price effects for irregular additions. Hence, we suggest price pressure hypothesis to explain returns behavior around the Nasdaq-100 Index reconstitutions. Whereas Elliott and Warr (2003) find partial price reversal for Nasdaq stocks, we found the price effects fully reversed within 40 days after the effective date.