Reaction Asymmetries to Social Responsibility Index Recomposition: A Matching Portfolio Approach

TL;DR

This paper examines how stock returns react to changes in the Dow Jones Sustainability Index, highlighting pre-announcement gains and the importance of timing and foresight for investors.

Contribution

It provides a detailed analysis of reaction asymmetries to index recomposition, emphasizing the significance of announcement effects over effective dates.

Findings

Significant positive abnormal returns occur before index addition.

Post-listing correction effects are present but limited.

Timing of announcement impacts investor strategies.

Abstract

Listing on the Dow Jones Sustainability Index is seen as a gold-standard, verifying to the market that a firm is fully engaged with a corporate social responsibility agenda. Robustly quantifying the impact of listing, and de-listing, against any industry level shocks, as well as evolution in the competitive relationship between firms within the industry, provides a strength absent in existing works. It is shown that cumulative abnormal returns on stocks added to the index are significantly positive in the three trading weeks prior to the official announcement. The post-listing correction result posited to date is also demonstrated to hold; the proportion of periods with significant negative returns is low, however. Announcement, rather than effective dates are critical to returns. Differentials between these stages in the chronology is an important contribution of this paper. Most effects end before the membership changes become effective. Whilst there are considerable gains to be made, they come pre-announcement date and require foresight to exploit. Investors must research likely new members to gain maximum return.