Asymmetric responses to stock index reconstitutions: Evidence from the CSI 300 index additions and deletions

- Reconstitutions to the CSI 300 with transparent selection methodology.
- Permanent optimistic response for additions but no significance for deletions.
- Increased monitoring enforces additions performing effectively.
- Additions attract more capitals from investors with lower cost of capital.
- Support investor awareness theory. Reconstitution is not information free.

This study investigates constituent changes to the CSI 300 index, which is scheduled semiannually in accordance with clearly-stated selection methodology. We find that stocks experience a permanent price increase and receive optimistic EPS forecasts from analysts following their addition to the index. These optimistic earnings expectations are supported by increased capital-raising activities and capital expenditure. Conversely, we do not find any significant results for index deletions. Evidence in the form of changes in the number of shareholders and shadow costs are consistent with the investor awareness theory. Increased investor awareness and monitoring forces newly-added firms to perform effectively, resulting in the attraction of more newly-issued capital from investors due to the firms' lower cost of capital. Monitoring and performance effectiveness, however, would not lessen sharply for deletions.