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Index revisions, market quality and the cost of equity capital.
Aldaya, Wael H.
Aldaya, Wael H.
Publication Date
2013-11-20
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The University of Bradford theses are licenced under a Creative Commons Licence.
Peer-Reviewed
Open Access status
Accepted for publication
Institution
University of Bradford
Department
School of Management
Awarded
2012
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Abstract
This thesis examines the impact of FTSE 100 index revisions on the various aspects of stock market quality and the cost of equity capital. Our study spans over the period 1986¿2009. Our analyses indicate that the index membership enhances all aspects of liquidity, including trading continuity, trading cost and price impact. We also show that the liquidity premium and the cost of equity capital decrease significantly after additions, but do not exhibit any significant change following deletions. The finding that investment opportunities increases after additions, but do not decline following deletions suggests that the benefits of joining an index are likely to be permanent. This evidence is consistent with the investor awareness hypothesis view of Chen et al. (2004, 2006), which suggests that investors¿ awareness improve when a stock becomes a member of an index, but do not diminish after it is removal from the index. Finally, we report significant changes in the comovement of stock returns with the FTSE 100 index around the revision events. These changes are driven mainly by noise-related factors and partly by fundamental-related factors.
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Type
Thesis
Qualification name
PhD