Market reactions to changes in the Nasdaq-100 Index membership

We examine stock market reactions around the Nasdaq-100 Index reconstitutions. We find a symmetric and transitory price response accompanied by a significant increase in trading volume on the effective date. Firms added to the Nasdaq-100 Index experience significant increases in institutional ownership, the number of market makers, and the number of shareholders. In contrast, firms removed from the index show significant decreases in the number of institutional shareholders. Additions to the Nasdaq-100 Index also show significant increases in four liquidity measures, whereas deletions demonstrate significant decreases in two liquidity measures. These changes in liquidity are related to the abnormal return on the announcement day. Taken together, the results suggest support for the price pressure, liquidity, and investor awareness hypotheses.