All Stocks are Not Created Equal: Evidence from the S&P Indexes Float Adjustment
32 Pages Posted: 18 Mar 2009
Date Written: March 17, 2009
Abstract
I examine the slope of the demand curve for stocks by analyzing the transition of the S&P 500, S&P MidCap 400, and S&P SmallCap 600 from market capitalization to free float weighting, which occurred in 2005. This unique information-free event allows isolating the effect of the decrease in demand for stocks from other possible competing effects offered in the literature. This decrease in demand produces a stock price decline, which is accompanied by significant abnormal trading volume. My main finding is that the slope of the demand curve is related to a stock's beta. Small beta stocks show a permanent decline in stock value, which is consistent with a downward sloping demand curve. In contrast, large beta stocks exhibit a transitory stock price reaction, which supports a flat long-run demand curve for stocks.
Keywords: stock prices, trading volume, event study, demand curve, beta
JEL Classification: G12, G14
Suggested Citation: Suggested Citation
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