Changes in cash holdings around the S&P 500 additions

► The cash holdings of S&P 500 firms decrease after their inclusion in the index. ► In 2 years, the mean industry-adjusted cash drops by 32%. Why? ► The firms are less constrained to raise external capital (precautionary motive subsides). ► Managerial entrenchment increases, which leads to a reduction in cash. ► Index firms' have decreasing capital expenditures, so the transaction motive is less.