We explore if entering and exiting an index affect stock prices
05-May-2023 •Samridh Rela
There's a certain prestige associated with featuring in BSE indices. After all, BSE is the oldest stock exchange in Asia.
But does the entry or exit from a BSE index affect a stock's price?
We decided to use the BSE 100 index as a case study to find out.
How companies fare post entry
From the last decade, we found that 34 companies have a share price history of three years before and after entering the BSE 100 index.
Of these, 33 companies gave higher returns in the three years before entering the index, with a median three-year absolute return of 148 per cent as compared to a median three-year return of six per cent after exiting the index.
The only exception was Tata Motors DVR, which gave an absolute return of 167 per cent in three years after its entry as against an absolute return of -74 per cent before its entry.
How companies fare post exit
Similarly, we found that 32 companies have a share price history of three years prior to and after exiting from BSE 100.
Among them, 18 companies gave better returns after exiting, with a three-year median return of 24 per cent post exit as against the -55 per cent prior to exit.
And the remaining 14 companies posted higher returns while in the index. Their three-year median return prior to exit was -4 per cent, while post exit, they gave a -63 per cent return.
It is evident that most companies performed better before entering the index. Similarly, nearly 56 per cent of the companies that had the required historical stock price data available on them performed better after exiting the index.
So the numbers do hint towards an underlying trend that being in the index has a negative impact on a company's share prices. So, does that mean its a given that if a stock enters an index it will underperform?
No. While we did find an underlying pattern drawing concrete conclusions from this trend is not advisable. There's a plethora of factors that can influence stock prices. While it can be said that the entry or exit from an index does have some effect on stock prices, it is but one of the many factors.
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