Index Effect: Neglected Exchange Of Constituent Stocks

The CSI 300 index regularly adjusts its member stocks,stocks deleted may not enter CSI 500 index,but they mostly do.The latter group of stocks switch from CSI 300 to CSI 500 index;therefore,they should be affected by CSI 300 index deletion effect and CSI 500 index addition effect.Existing domestic literature focused on the overall CSI 300 index deletion effect,but ignored the CSI 500 index addition effect of switching group.An old Chinese saying goes,“Better be head of a dog than the tail of a lion”.When small-cap stocks in CSI 300 become relatively large ones in CSI 500,i.e.the “tails of lion” become “heads of dog”,there will be more money tracking it.The second chapter compares the development of the two indexes.Since the establishment of the CSI 500 index in January 15,2007,there has been more and more assets tracking it.In 2009,when the first mutual fund tracking CSI 500 index was established,there were no less than 9 funds tracking the CSI 300 index with much larger scales.However,by the end of 2015,there was 36.5 billion yuan tracking CSI 500 index and 124.8 billion yuan tracking the CSI 300 index,the former was close to one third of the latter.There was more money tracking CSI 300 index,but the weights of the switching stocks in the CSI 500 index were much larger than in CSI 300 index.The addition effect of the CSI 500 index has probably exceeded the deletion effect of the CSI 300 index.In the third chapter,this paper uses fuzzy regression discontinuity design to study the price effects of switching group.Stocks switched from the CSI 300 index to CSI 500 index showed a significant addition effect as soon as the third trading days after the announcement day.The addition effect is about 6% and is robust to different bandwidths.On the other hand,stocks switched from the CSI 500 index to the CSI 300 index had no significant price effect.The asymmetric price effect seems to be the result of investor awareness or short sale restrictions.The price effects of the switching group have an obvious time trend.Before 2015,the price effects of the switching group were just slightly influenced by the CSI 500 index when there was less money tracking CSI 500 index.But after 2015,as the tracking assets increases,the price effects of switching group were heavily influenced by the CSI 500 index.Specifically,for the stocks switched from CSI300 index to the CSI 500 index,the price effect was non-significant before 2015 but became significant after 2015.For the stocks switched from CSI500 index to the CSI 300 index,the CSI 300 deletion effect is dominant before 2015,but the price effect became non-significant after 2015.It seems the CSI 500 index deletion effect offset most of the CSI 300 addition effect.In addition,to compare the price effects of switching group and other deleted stocks,the fourth chapter studies the abnormal of these two groups with a market model.The results indicate that these two groups different significantly,the addition effect plays a dominant role in the switching group,while other deleted stocks show a significantly deletion effect,the switching group has a 6% higher abnormal return than the latter group.The results remain robust when control fundamentals and liquidity of the stocks.When studying the stocks that get added to the CSI 300 index,it doesn't seem to matter whether the added stocks come from CSI 500 index or not.This implies that investors,or to be precise,the arbitragers do not seem to pay much attention to the deleted stocks.Overall,our results support the price pressure hypothesis(PPH).The price effects result from short-term price pressure and nearly fully reverse soon after the execution day.As more and more assets tracking the CSI 500 index,the CSI 500 addition effect of switching group has dominated its CSI 300 addition effect.Ignore this addition effect may lead to a non-significant,or even a positive deletion effect.In order to further test the Price Pressure Hypothesis,the fifth chapter takes the phenomenon that investors “buy stocks for preemptive rights” when convertible bonds are issued,and tests the impacts of demand changes on the stock price before and after the stock registration date.When list companies finance with convertible bond,the priorities to buy convertible bonds were given to stockholders to prevent the dilution of shareholders' equity caused by the conversion of convertible bonds into shares.As convertible bonds can bring considerable initial return to investors,and the lot winning rate is too low to win a lot,investors turn to buy shocks on or before the equity registration date to obtain preemptive rights.This kind of behavior of investors is called "right grabbing allotment" in the market.In the fifth chapter,we use the event study method to test the excess return rate before and after the equity registration date.The results show that there is a significant positive excess return before the equity registration date,and a significant negative excess return after the equity registration date.On the registration day,holding of shares could bring investors the priority to buy convertible bonds,while after the registration day,this priority disappears.Therefore,the stock price should have a negative excess return after the registration day to reflect the disappearing of the priority value,and the greater the priority value,the greater the negative excess return.In this paper,we first calculate the amounts of shares(denoted by Lev)needed to buy if they want to get 1-yuan convertible bonds allocation,and use it as an proxy variable of the priority value.Theoretically,the lower the LEV,the lower the amounts of stock investors need to buy,and the greater the priority value contained in the stock.Then sorted by LEV,this paper divides the samples into five groups(from low to high to test whether there is significant abnormal return near the registration date.The results show that the excess return of the group with lowest Lev is-1.77%,while that of the highest group is only-0.05%.There is a significant difference between the two groups,reflecting the significant difference of the priority value between different groups.In addition to the index effect,the periodic adjustment of index also provides a good sample for many other researches.For example,the co-movement between stocks,analyst coverage,the shareholding of institutional investors,and the risk of stock price crash.In order to further analyze the impact of indexes exchange component stocks,the sixth chapter examines the impact of component share exchange on the stock price crash risk.If add to an index do have a significant impact on the stock crash risk,then whether the stock is added to CSI 300 index or CSI 500 index,the stock crash risk should have a similar impact,although there may be some differences in the significance.Therefore,when studying the impact of stock transfer into the CSI 300 index on its price crash risk,it is necessary to consider whether it was originally a component of other indexes.If the added stock was already a component of other indexes before the added to CSI 300,the impact of re-add to the CSI 300 index on its price crash risk will be significantly undervalued.The empirical results of this paper are consistent with the above analysis: on the whole,add to the CSI 300 index significantly reduces the of stock price crash risk;but it is mainly for those stocks that were not originally CSI 500 index,stocks transferred from CSI 500 index to CSI 300 index are almost unaffected.The innovations of this paper are mainly as follows:First,this paper uses regression discontinuity design to prove that there is significant price effect of indexing in China.Although(Yao Dongmin et al.,2016)have used regression discontinuity design to study the price effect of the CSI 300 index,they did not consider that the stocks added to the CSI 300 index may come from the CSI 500 index;while the stocks deleted from CSI 300 index may also added to CSI 500 index,and these matters are fatal when RDD method was used.In this paper,we use fuzzy RDD to prove the existence of short-term price effect when switching of component stocks were considered.Second,this paper considers the impact of domestic index exchanging component stocks on the price effect for the first time,and explains why the results of existing domestic research are not significant.In this paper,the samples are grouped according to whether there is component stock exchanging,and the influences of component stock exchange on the traditional research are studied.For example,when CSI 300 deleted stocks are studied,this paper divides all of the CSI 300 deleted stocks into two groups according to whether they enter the CSI 500 index or not: those who enter the CSI 500 index are denoted as the D300i500 group;those who do not enter the CSI 500 index are denoted as the D300 im group.As the former group also has significant addition effect of CSI 500 index,and is stronger than CSI 300 index deletion effect,the abnormal return of D300i500 group is positive,which will offset most of the transfer out effect of D300 im group,resulting in an overall "insignificant" addition effect of CSI 300 index.Third,this paper proves that other options brought by holding stocks will also have a significant impact on the stock prices.Under the current market value allotment system of new shares issued by A-share,investors are entitled to subscribe new shares only when they hold secondary market shares,so investors can also obtain the right to apply for new shares when they hold A-share(Lin Hongmei et al.,2019);when major shareholders hold a certain proportion of shares,incremental shares can bring them the right to control the operation of the company(FOS & Jiang,2016);when convertible bonds are issued,they will preemptive allotment to shareholders,As a result,when a listed company issues convertible bonds,investors can acquire the right of first placing convertible bonds by holding its shares.These rights which have been ignored by many researches but have obvious value that cannot be ignored.This paper proves that the value of the priority placement right of convertible bonds can significantly affect the stock price,which enriches such literature and has an important reference value for investors in stock pricing.