Changes in the composition of the WIG20 and mWIG40 indices and the operational performance of newly added companies

Abstract

The rise in stock prices of companies following their addition to stock market indices is a well-documented and recognized phenomenon in financial literature. Contemporary research, however, suggests that the effects of being added to an index reach beyond mere stock price adjustments, impacting various facets of a company’s operations, including its operational efficiency. Moreover, the transition of companies between indices, such as moving from the mWIG40 to the more prestigious WIG20, can profoundly influence their operational effectiveness. These shifts in index composition not only elevate a company’s popularity among investors, but also encourages market scrutiny, potentially leading to an overall enhancement in company performance. The purpose of the article was to investigate the impact of such change on the operational performance of firms during the period 2000-2020. In the analysis of the examined companies, indicators of operational efficiency were calculated before and after the change in the indices’ composition. Then, the t-Student test was applied in order to assess whether the movement between indices was associated with a statistically significant improvement in operational results. The analysis of profitability indicators based on earnings before interest and taxes (EBIT) did not reveal statistically significant differences before and after the change in the composition of both indices. Statistically significant changes were observed only in the case of the indicator based on sales profit. These results suggest that inclusion in an index does not necessarily signal future improvement in a company’s operational performance. On the other hand, the lack of substantial differences could be attributed to the relatively short reaction time considered after the company's transition to the WIG20 index. Future research might benefit from examining a longer post-transition period, or incorporating a broader array of performance metrics to better understand the nuanced effects of index inclusion on company operations.