S&P 500 Index Revisions And Analyst Coverage

Abstract

This paper examines theimpacts of revisions in the composition of the S&P 500 Index on theinformation environment of sample firms being added to or deleted from theIndex. We use the intensity (number of analysts and number of earningsestimates) and the quality (earnings forecast dispersion and accuracy) ofanalyst coverage to measure the information environment of sample firms. Wefind that firms that are added to the Index experienced significant increase inanalyst coverage while those deleted from the Index suffered reduction inanalyst coverage following the revision in the S&P 500 Index. The findingson the quality of analyst coverage also provide supportive evidence.  There are increases in earnings forecastdispersion for both added and deleted firms, and improvements in forecastaccuracy for sample firms. In addition, further findings indicate a negativecorrelation between the impact of index revision on the information environmentand the intensity of pre-revision analyst coverage on the sample firms. Overall,our results suggest that index revisions have material impacts on the informationenvironment of sample firms that were added to, or deleted from, the S&P500 Index over the sample period of 1990 – 2007.