Index Rebalancing and its Valuation Ripple: A Deep Dive into Nifty 500 Companies

Abstract

The purpose of this study is to investigate how addition and deletion of companies from the index affects their market valuation. For this research, the NIFTY 500 index was taken into consideration as it is a well – diversified benchmark index. A total of 54 events in year 2024 were selected initially but only 40 companies were taken into the consideration for further analysis due to non – availability of data. To determine the shifts in valuations based on return generation during the event period, event study methodology was used as introduced by (MacKinlay, 1997). The study evidenced insignificant results related to both events i.e. inclusion and exclusion which is inconsistent with the prior literature. Despite the fact that the NIFTY 500 index companies were chosen mostly on their market size, investors could not yet have complete faith in them. Since investors still believe that the excluded companies fundamentals are robust, their exclusion is likewise unimportant to them. The NIFTY 500 index is quite huge which slows down the flow of information into the market and suggests that larger indices are associated with less efficient markets.