Academic journal article The International Journal of Business and Finance Research

The Price Response to Nikkei 225 Stocks Index Adjustments

Academic journal article The International Journal of Business and Finance Research

The Price Response to Nikkei 225 Stocks Index Adjustments

Article excerpt

ABSTRACT

Using Nikkei 225 Index adjustment data, this study examines price response to changes in index composition. This study demonstrates that prices of stocks added to and deleted from the Nikkei 225 Index respectively fluctuate accordingly on the announcement day. These price trends then reverse during the post-announcement period. The results are consistent with the price pressure hypothesis. By classifying the composite stocks into two categories, this study finds that small-scale stocks exhibit larger price responses than large-scale stocks. In addition, the results show that newly added stocks with upward revised earnings forecasts earn more abnormal returns during the post-announcement period. The results shed more light on the information content associated index adjustments in the Japanese stock market.

JEL: G15 ; G32

KEYWORDS: Nikkei 225 Index, price responses, earnings forecast revision

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

Numerous studies have examined the price responses of stocks to index adjustments. Harris and Gurel (1986), Shleifer (1986), Wurgler and Zhuravskaya (2002) and Chen et al. (2004, 2006) examined changes in composition of the S&P 500 Index. Some studies have focused on non-U. S. stock indices. For instance, Chakrabarti et al. (2005) applied a widely used set of country equity indices, the MSCI country indices, for 29 countries to the returns of stocks added to or removed from indices around the event dates. They found that stock returns and volumes exhibit an "Index effects" in international markets.

The Tokyo Stock Exchange is the largest stock exchange in South East Asia and the third largest in the world by market capitalization. However, little attention has focused on changes in the composition of the most broadly quoted Japanese stock index, the Nikkei 225 Index. Hanaeda and Serita (2003) examine large composite change in the Nikkei 225 Index that occurred on April, 2000. But, they only consider a single event change. Okada et al. (2006) used a large Nikkei 225 Index sample from 1991 through 2002 to investigate the stock price and volume behavior of firms around the time of their addition to the index. However, they did not consider the stock price and volume behavior of deleted firms. This study uses the composition changes in the Nikkei 225 Index to study the pricing effects.

Liu (2000) examined the effects of changes in the Nikkei 500 Index on stock prices and trading volume. He found significant price increases (decrease) for added (deleted) stocks with no post-event reversal (The event window is -15 to +15 days). Furthermore, Okada et al. (2006) used the Nikkei 225 Index to investigative the stock price and volume behavior of firms around their addition to the index. They found the stock prices of firms added to the Nikkei 225 increased on the announcement date, continue to increase until the day before the effective change date, and then decrease on and immediately after the change date. This occurred on average, approximately five business days between the announcement date and the actual change date. The Nikkei 225 and 500 Indices are price-weighted averages of 225 and 500 actively traded stocks on the first section of the Tokyo Stock Exchange. The reason that different studies have obtained different empirical results is unclear, but possibly may be due to the fact that the Nikkei 500 includes more small-cap stocks than the Nikkei 225. This study attempts to separate the added and deleted stocks into two types depending on market value. Next we examine which firm types exhibit larger price responses. Besides categorizing composite stocks into different market value segments, this study also classifies firms using analyst earnings forecasts to explore the price reactions of upwards or downwards earnings forecast revisions of firms added to the Nikkei 225. For the firms deleted from the Nikkei 225 Index, the earnings forecast data is limited. …

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