Changes in the DJIA: Market Reactions and Impact of Estimation Window

Changes in the DJIA from 1929-2019 are examined to evaluate the immediate and long-term market reaction after a component change in the DJIA. Using multiple event study methodologies, there is a clear increase in wealth when a firm is added to the DJIA and a decrease in wealth around the time of deletion from the DJIA. Additions earn positive abnormal returns regardless of estimation window. The choice of estimation window is critical for deletions as we show that this is the reason for the difference in results in the literature. Using a post-estimation window, deletions have a more significant negative wealth effect. Using pre-estimation window, returns are negative post announcement, but not at the announcement. Long term, firms added to the DJIA have positive abnormal returns in the second year after inclusion. Deletions from the DJIA after the Great Depression have negative returns three years after removal thus implying a potential investment opportunity upon DJIA changes.