Illusion, Perception and Reality: Stock Splits and Index Inclusions
aswathdamodaran.substack.com
After big market movements, we are eager to look for explanations, fundamental reasons why a stock or stocks collectively moved on that day, but the reality is that a great deal of the price movement on a day-to-day basis has nothing to do with earnings, cash flows or risk. On August 31, this reality was brought home by two events, neither with a strong connection to fundamentals, that represented the news of the day and contributed to price movements. The first was that two of the highest profile stocks in the market, Apple and Tesla, had stock splits that day (August 31), though the market had been trading on the expectation of these stock splits, for weeks leading into the day. On the same day, the Dow 30, a hopelessly flawed, but still among the most followed indices in the market, also announced a major reshuffling, replacing Exxon Mobil, Pfizer and Raytheon, three of its components, with Honeywell, Amgen and Salesforce. That gave rise to a wave of speculation about whether these new entrants would be helped or hurt by their inclusion in the index. While it is easy to dismiss stock splits and index inclusions as non-events, that dismissal is contradicted by market behavior, which, rational or not, seems to view them as consequential.
Illusion, Perception and Reality: Stock Splits and Index Inclusions
Illusion, Perception and Reality: Stock…
Illusion, Perception and Reality: Stock Splits and Index Inclusions
After big market movements, we are eager to look for explanations, fundamental reasons why a stock or stocks collectively moved on that day, but the reality is that a great deal of the price movement on a day-to-day basis has nothing to do with earnings, cash flows or risk. On August 31, this reality was brought home by two events, neither with a strong connection to fundamentals, that represented the news of the day and contributed to price movements. The first was that two of the highest profile stocks in the market, Apple and Tesla, had stock splits that day (August 31), though the market had been trading on the expectation of these stock splits, for weeks leading into the day. On the same day, the Dow 30, a hopelessly flawed, but still among the most followed indices in the market, also announced a major reshuffling, replacing Exxon Mobil, Pfizer and Raytheon, three of its components, with Honeywell, Amgen and Salesforce. That gave rise to a wave of speculation about whether these new entrants would be helped or hurt by their inclusion in the index. While it is easy to dismiss stock splits and index inclusions as non-events, that dismissal is contradicted by market behavior, which, rational or not, seems to view them as consequential.