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Cost of Equity and S&P 500 Index Revisions
Author(s) -
Baran Lindsay,
Dolly King TaoHsien
Publication year - 2012
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/j.1755-053x.2012.01186.x
Subject(s) - cost of equity , market liquidity , shadow (psychology) , implicit cost , equity (law) , monetary economics , cost of capital , index (typography) , economics , equity ratio , business , finance , equity capital markets , total cost , private equity , microeconomics , profit (economics) , psychology , world wide web , political science , law , computer science , psychotherapist
We examine how the cost of equity changes when firms are added to or removed from the S&P 500 Index during index revisions. Newly added firms experience a significant decline in the cost of equity, while recently removed firms show a significant increase. Liquidity improves for addition firms and declines for removed firms. Addition firms also experience a decline in shadow cost. Changes in cost of equity for included firms are explained by changes in liquidity, shadow cost, and firm size. Finally, included firms with greater investment opportunities benefit more from the reduction in cost of capital.