A recent literature uses the annual reconstitution of the Russell 1000 and 2000 Indexes as a source of seemingly exogenous variation in institutional ownership to study the effect of institutional ownership on firm outcomes. We show that lagged institutional ownership measured prior to reconstitution exhibits very similar pre-existing differences at the 1000/2000 cutoff, and thus the results from the most common implementation of this setting (e.g., as in Bird and Karolyi, 2019) reflect selection bias instead of a treatment effect. Additional tests confirm that it is the use of rankings based on Russell’s June index weights that leads to biased results. With an unbiased approach, there is no significant discontinuity in institutional ownership at the 1000/2000 cutoff despite the large difference in index weights.
Selection Bias or Treatment Effect? A Re-Examination of Russell 1000/2000 Index Reconstitution
We thank two referees; the Editor, Ivo Welch; Yi Cao, Kyoung Jin Choi, Sergio Correia, Simon Gloßner, Davidson Heath, Wei Jiang, Allison Koester, Bin Li, Yan Liu, Bill Mayew, Pablo Moran, Miguel Palacios, Marlene Plumlee, Matthew Ringgenberg, David Robinson, Martin Schmalz, Avanidhar Subrahmanyam, Robert Van Ness, Toni Whited; conference and seminar participants at the University of Calgary, Duke University, North Dakota State University, and the AAA Annual Meeting (2018); and especially Alon Brav for helpful comments that have improved the paper. We also thank Brian Bushee, Jason Chen, Harrison Hong, and Inessa Liskovich for sharing data. Replication files posted at https://osf.io/gku6j
Wei W, Young A (2024), "Selection Bias or Treatment Effect? A Re-Examination of Russell 1000/2000 Index Reconstitution". Critical Finance Review, Vol. 13 No. 1-2 pp. 83–115, doi: https://doi.org/10.1561/104.00000137
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