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Information Costs and Liquidity Effects from Changes in the Dow Jones Industrial Average List

Published online by Cambridge University Press:  06 April 2009

Messod D. Beneish  and
John C. Gardner
Messod D. Beneish
Affiliation:
Fuqua School of Business, Duke University, Durham, NC 27708
John C. Gardner
Affiliation:
School of Management, State University of New York at Binghamton, Binghamton, NY 13901
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Abstract

We examine the stock market effect of changes in the composition of the Dow Jones Industrial Average (DJIA). Unlike S&P 500 listing studies, we find that the price and the trading volume of newly listed DJIA firms are unaffected. We attribute this result to a lack of index fund rebalancing, since index trading is limited for most of our sample period and index funds mimic the S&P 500, not the DJIA. Firms removed from the index, however, experience significant price declines. We consider information signaling, price pressure, imperfect substitutes, and information cost/liquidity explanations for these asymmetric findings. The evidence is consistent with the information cost/liquidity explanation, which holds that investors demand a premium for higher trading costs and for holding securities that have relatively less available information.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 30 , Issue 1 , March 1995 , pp. 135 - 157
Copyright
Copyright © School of Business Administration, University of Washington 1995

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