What’s it worth for a company to be included in an important equity index, such as the S&P 500? A great deal, it would appear, judging by how frequently executives admit that the planning and timing of acquisitions, divestitures, and other strategic moves are influenced by hopes of getting companies into equity indexes and keeping them there.
Our research into the effect of inclusion in the S&P 500 on a company’s share price indicates that entry into or expulsion from a major index does indeed have an impact. Yet it is short-lived, for membership isn’t a factor in long-term capital market valuations.1 Executives should therefore plan and pursue strategies irrespective of whether these measures might exclude companies from or help companies gain entry to the major indexes.
On the surface, becoming a member of an index such as the S&P 500 is appealing because many large institutional investors track these stocks by purchasing them. Once a stock is added to the index, it is argued, demand—along with the share price—will increase dramatically as institutional investors rebalance their portfolios. As long as that demand continues, so will the premium.
Adjustments in 2000 to the companies listed on the S&P...