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Abstract

This study is aimed to study to effect of exclusion from and inclusion into the index on the companies’ valuation. The study has the time period of 20 years spanning from 1996-97 to 2015-16. Being the diversified and benchmark index, Nifty 50 index was considered for the study. A total of 126 such events were selected, where a company has been excluded from or included into the index. Event Study Methodology was adopted to find the change in valuations based on return generation during the event period. The value implication of index exclusion and inclusion on stocks involved was on expected lines as the former resulted in downward valuation and the latter resulted in upward valuation. The study evidenced a negative effect on the valuation of the companies excluded from the index, but the effect was short lived and having the absence of excessive downward valuation to confirm the semi-strong form of market efficiency. After having a downward valuation, the excluded stocks recorded reversal as a result of purchase pressure by non index fund investors to purchase recently excluded stocks. In case of inclusion, after having upward valuations, reversal of returns was recorded, with increased selling pressure by the index fund investors. The study in both cases has confirmed the semi-strong form of efficiency. 

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