Changes in the DJIA: market reactions and economic cycles

The purpose of this study is to explain the mixed results to changes in the DJIA index documented in the literature. The authors show that economic cycles, especially recessionary periods, explain the difference in findings.

The authors examine changes in the Dow Jones Industrial Average (DJIA) from 1929 to 2019 to evaluate immediate and long-term market reactions after a component change. Using multiple event-study methodologies, the authors examine the full era, the pre- and post-exchange traded fund (ETF) windows and economic cycles using both pre and post-estimation windows.

In aggregate, DJIA additions do not present an increase in wealth; however, wealth effects are positive during expansions and negative during recessions. Deletions have a negative wealth effect. The authors find weak evidence of an indexing effect. Additions are positive post-1998, and deletions remain negative regardless of era. In the long run, firms added to the DJIA have positive abnormal returns in the second year after inclusion. Deletions in recessionary times have negative returns three years after removal, a signal of longer-term wealth decline for these firms.

The DJIA changes periodically to better represent industries relevant to the blue-chip market, and the findings have implications for fund managers and active investors.

The DJIA changes periodically to better represent industries relevant to the blue-chip market, and the findings have implications for fund managers and active investors.

Prior literature presents limited time series of data points and mixed results and implications. The authors find that the economic cycle is a driving factor that supports predicted signs and amounts of wealth change. Furthermore, the authors see limited ETF impact on DJIA changes and some impact of the choice of estimation period.