You Can Relax Once You’re in the Index

Programming note: Money Stuff will be off tomorrow, back on Thursday.

We talked last week about a paper by Lysle Boller and Fiona Scott Morton that found that, when a company joins the S&P 500 index, (1) its stock goes up and (2) the stocks of its competitors in the index also go up. We talk a lot around here about the theory that common ownership of multiple companies by the same large diversified investors reduces competition among those companies, because all the companies’ profits are going to the same place anyway; if you all work for the same owners, why cut prices to gain market share? The result fits neatly with that theory: When you join the index, your common ownership with other firms in the index goes up (because a lot of index funds who already own their stock also buy your stock), so you should compete with them less, so your industry gets less competitive, so you and they both start earning fatter profits.