Keeping up with the Joneses and the real effects of S&P 500 inclusion

Firms added to the S&P 500 index join a prestigious and exclusive club. They want to fit in the club, which creates a “keeping up with the Joneses” effect. Firms pay more attention to their index peers after inclusion and their investment, external financing, and payouts comove more with their index peers. These effects do not appear to result from the increased coordination among investors posited by the common ownership literature as inclusion does not cause a decrease in competition. Since index inclusion does not increase shareholder wealth permanently, these peer effects do not appear to benefit shareholders.