Changes in the Constituents of the S&P 500 Index and the Performance of the Index

We investigate whether performance enhancement motivates the changes to the constituents of the Standard and Poor’s 500 Index, and whether these changes in fact enhance the Index’s performance. To test these, we compare the performance of the stocks that were deleted from the Index to the performance of those that were added before and after the delete/add events. Our results show that stocks that were added to the Index outperform those that were replaced before the events, suggesting that performance enhancement is a driver of the S&P committee’s delete/add decisions. Also, we find that the stocks that were added to the Index outperform those that were replaced after the events, indicating the delete/add events enhance the Index’s performance.