Bryan Mase

The Impact of Changes in the FTSE 100 Index

This paper examines both the long-term and short-term impact associated with changes in the constituents of the FTSE 100 Index. We find that stocks exhibit positive (negative) abnormal long-run performance following their inclusion in (deletion from) the index. There is also evidence of significant short-term cumulative abnormal returns around the event. The reversal of these price effects suggests that short-term buying (selling) pressure (possibly from index trackers) moves prices temporarily away from equilibrium. An analysis of stock liquidity implies speculators may trade in advance of the announcement, while index trackers trade between the announcement and event dates. Finally, the organisation of the FTSE 100 Index enables us to conduct an analysis of stocks that just avoid being relegated from (fail to be promoted to) the FTSE 100.

Comovement in the FTSE 100 Index

This article extends recent research (Barberis et al., 2005) on the impact of index changes on stock comovement. Stocks that are added to the FTSE 100 comove more closely with the FTSE 100, whilst the reverse is found in stocks deleted from the FTSE 100. Consistent with previous research, these changes appear to have become larger over more recent years. As a result of the method by which changes are made to the FTSE 100, this article is able to distinguish between additions that are new firms and additions that have previously been constituents. There is a significant difference between these two sets of firms, both in terms of the change in comovement and the extent of their comovement after addition to the FTSE 100. Specifically, it is the change in comovement among firms that are new to the FTSE 100 that drives much of the overall increase in comovement among additions. This result implies that the change in comovement cannot be explained solely by the behavioural finance view of comovement and the associated impact of category or habitat traders.

Investor awareness and the long-term impact of FTSE 100 index redefinitions

This study finds an asymmetric long-run abnormal return performance following stocks’ inclusion in or deletion from the FTSE 100 Index. This asymmetry suggests that investors’ awareness of stocks is influenced by index changes. These results extend those documented by Chen et al . (2004) for the S&P 500.

Rolling settlement and market liquidity

This paper investigates the impact on UK stock and option markets of the change from an account based settlement system to a rolling settlement procedure. Such a change increases the transaction costs of short-term margin traders, and is likely to impact on the liquidity of the underlying market, as well as trading in the options market. Evidence is presented that the settlement procedure does impact on the liquidity of the market. Further, we find that rolling settlement increased market liquidity, consistent with the exit of margin traders as a result of the increase in short selling costs. Associated with this increase in liquidity is a significant reduction in nonoptionable stock trading volume, implying that margin trading may have been more prevalent in stocks without options. Finally, it is shown that while trading in stock options increased, the volatilities implied from call and put option prices indicate that put options have become relatively more expensive. This reflects the change in demand induced by the new settlement procedure, especially in terms of the increase in short selling costs.

A change of focus: Stock market reclassification in the UK

Abstract This paper examines the impact of a change of focus by a firm, as signified by a firms stock market reclassification. It distinguishes between a firms sector reclassification motivated by information specific to that firm and one that results from the redefinition and reorganisation of a sector. The direction of the price effects following reclassification depends significantly upon this distinction. Furthermore, a stocks return comovement with the FTSE All-Share Index is affected by its reclassification into a new sector, consistent with the allocation of stocks into categories by investors. Reclassification can induce common factors in the returns to stocks in an index without there being any change in these stocks’ fundamental cash flows.

Executive Stock Option Exercises and the Predictive Ability of Transaction Value

This paper investigates the predictive ability of executives’ stock option exercises by categorising all exercises by the overall value of the transaction. This measure incorporates the cost to the executive of exercising the option, together with the income generated by the associated sale of stock at the time of exercise. As a result, we show that, in contrast to the existing literature, executive stock option exercises do have predictive ability for future stock returns. This is, however, limited to transactions that generate net revenue for the executive, a finding that is the reverse of the evidence relating to standard executive transactions.