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 co-move 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.