Valuation Effects of Index Inclusions - Evidence from Sweden

Sammanfattning: The paper studies the volume and share price effects on Swedish stocks added to a domestic as well as an overseas market index over the sample period 1987 to 2006. Contrary to the vast majority of previous research, we document a mildly negative impact on stock prices, particularly for Swedish stocks added to overseas indices. Attempts to explain this finding, by linking it to an explanatory variable, point to a negative relationship with performance during the six months preceding index inclusion. Our findings thus indicate that index inclusion can be an indirect trigger of price reversal, when the index selection criteria themselves are an indication of strong trading activity in the period ex ante index inclusion.