Yuanbin Xu (2012), writing his masters degree thesis at Brock University, in St. Catherines, Ontario, Canada, examined stock market reactions around the Nasdaq-100 index reconstitutions from 1997 to 2010.
The Nasdaq-100 index changes have been performed in two ways: regular index changes and irregular index changes. Regular annual index changes are primarily based on market capitalizations. The public announcement is usually released via a press release in early December and changes become effective after market close on the third Friday of December. The market capitalizations are calculated using the Nasdaq official closing price on the last trading day of October, and shares outstanding from a public SEC document available on EDGAR as of the end of November. Given that this data is generally accessible to all investors, regular index changes have been predictable.
In contrast, irregular index changes occur when securities no longer meet the eligibility criteria. Neither the specific time nor the reasons are publicly known until they are released, so irregular index changes have usually been unpredictable.
In Xu’s sample included 205 additions and 136 deletions from the index. 136 additions and deletions were regular while 69 additions were irregular. Nearly all of the irregular deletions were involved in confounding events and therefore were not included in the sample studied.
For the regular additions, Xu found a significantly positive, abnormal return of 0.76% on the announcement day. The cumulative abnormal return from the first day in December to the day before the announcement day averaged 3.66%. This was also statistically significant. However, he also found that prices reversed completely, on average, by the effective date of the third Friday in December. The results were mixed for regular deletions from the index.
On average, the irregular additions to the index experienced an abnormal return of 1.28% on the announcement date and 1.73% on the following day. And, another gain of 1% occurred on the effective day. The price reversal started the day after the effective date, and that was a significantly negative 1.37%.
In summary, Xu noted, individual investors could could profit by purchasing stocks added to the Nasdaq-100 index, and shorting stocks deleted from the index, on the announcement date, and then closing the position on or before the effective date.