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Naturally, market capitalization weighted indexes and the funds that track them must adjust to these changes. For the S&P 500 Index, those adjustments are made on a daily basis. In fact, Standard and Poor's monitors corporate activity and announces share changes three times a day during market hours: 10:00 a.m., 12:30 p.m. and 2:30 p.m. These announcements are effective at the close of trading on the same day. S&P also announces weekly share count reviews on Tuesdays at 5:15 p.m., after the market is closed; these changes are made effective after the close of trading the following day. While many of these changes are relatively small, they can be dramatic, running as high as a 60-80 percent adjustment to a company's share count. These changes may trigger significant share purchases and sales by passive managers, who are benchmark-sensitive, within a concentrated time frame. With the growing number of indexed assets tied to the S&P 500 (indexed assets now account for 9.5 percent of the market capitalization of stocks in the index), it important to understand how these share change announcements affect the stock prices of the components in question. To do this, we studied 123 S&P 500 share changes that took place from January 2003 to May 2005. Within this set, there are almost four times as many increases as decreases (Figure 1). We restricted our data set to the daily and weekly changes, excluding quarterly share adjustments. We also screened out share updates driven by mergers and acquisitions between members of the index, as these do not result in trading activity by passive managers.
Our main conclusions for S&P 500 constituents during the study were:
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The sizes of America's leading corporations are always changing. Mergers, acquisitions, secondary offerings, convertibles, share buybacks … routine financial activities have a meaningful impact on share counts (and therefore market capitalizations).
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