Spillover effects of MSCI inclusion announcement: Evidence and implications from China

Abstract

We investigate the price reactions of stocks that would not be included in the MSCI global indices to the MSCI inclusion announcement. We document a positive revaluation effect for connected stocks, but not for unconnected stocks. Based on the institutional background and existing theories, we propose three non-competing hypotheses: the signaling hypothesis, the speculative trading hypothesis, and the market integration hypothesis. With a series of tests, we demonstrate that the market integration hypothesis can explain this phenomenon. Specifically, the price revaluations of connected stocks are proportional to firm-specific conditional market risk, and this relationship is stronger in firms with high transparency and liquidity and is dampened by the existence of B- or H-shares. Our paper provides new evidence and insights into the impact of global index inclusion on asset prices and the degree of market integration.