Abstract
According to financial theory, perfect arbitrage aligns stock prices to fundamentals, hence evening out any price impact of demand. This paper provides empirical evidence to the contrary by looking at the cross-section of S&P 500 index inclusion returns. The lower the stock supply, proxied by the fraction of shares held by corporate control holders, the larger the abnormal return. It suggests not only that demand-curves for stocks are downward-sloping, but also that stock supply is of importance. The float-adjustment of S&P 500 index weights in 2005 enables a test for downward-sloping demand curves in a natural experiment. As predicted by a demand story, the cross-sectional price impact of control ownership declines after the reform and effectively disappears. Unlike in the earlier part of the sample, even the well-known S&P 500 average inclusion return reverts quickly. This finding is consistent with the interpretation that arbitrage has become more efficient.