S&P 500 Index Addition, Liquidity Management and Tobin's Q
Accounting & Finance, Forthcoming
Posted: 7 Apr 2015 Last revised: 6 May 2015
Date Written: September 19, 2014
Abstract
This study examines the revision in cash holdings and the market valuation of investment opportunities of 475 firms added to the Standard & Poor's 500 stock market index from 1980 to 2010. We find that newly indexed firms have evolved to significantly lower cash balances, which we partially explain by the decreasing growth opportunities following index inclusion. Consistent with index inclusion loosening financial constraints, we document a larger decrease in cash for index inclusions in sectors with high financial dependence. We sort S&P 500 inclusions by corporate governance but do not find any empirical support that changes in cash and Tobin's Q are related to management entrenchment.
Keywords: S&P index effect, Tobin's Q, cash holdings, financial policy.
JEL Classification: G14, G32.
Suggested Citation: Suggested Citation