New evidence on stock price effects associated with changes in the S&P 500 index

Since October 1989, Standard and Poor's has (when possible) announced changes in the composition of the S&P 500 index 1 week in advance. Because index funds hold S&P 500 stocks to minimize tracking error, index composition changes since this date provide an opportunity to examine the market reaction to an anticipated change in the demand for a stock. Using post-October 1989 data, we document significantly positive (negative) postannouncement abnormal returns that are only partially reversed following additions (deletions), These results indicate the existence of temporary price pressure and downward-sloping long-run demand curves for stocks and represent a violation of market efficiency.