Existence of Price Pressures Surrounding Annual Changes in the “Dogs of the Dow” Portfolio

We examine market response to changes in the annual “Dogs of the Dow” (DOD) portfolio. Specifically, we explore stock prices and trading volumes of the Dow stocks that are newly included into or excluded from the DOD portfolio. Although the historical performance of this popular dividend-driven investment strategy is subject to debate, our study focuses on investigating Harris and Gurel’s (1986) “noninformation-motivated demand shifts” in the sample of DOD additions and deletions. Utilizing standard event study methodology over the period 1996–2016, we find evidence that a Dow stock experiences a significant but temporary increase (decrease) in price when it is newly included into (excluded from) the DOD portfolio. Price reversals occur within one week of the reconstitutions. We also find that trading volumes temporarily increase following both index additions and deletions. The results support the price-pressure hypothesis as the DOD reconstitutions do not generally convey new information.