This study examines the CEO incentives to join the S&P 500 Index member club by managing the reported earnings. Based on a sample of 583 index additions from 1989 to 2022, we document a significantly positive abnormal return from the announcement to the effective date, and a slight reversal in the long-term post-inclusion performance. Similarly, operating performance flourishes prior to inclusion but deteriorates post-inclusion. These phenomena are consistent with earnings management hypothesis. We further examine the accrual-based and real earnings management measures of additions and find that some of additions may engage in boosting the reported earnings. Finally, we explore the CEO incentives by examining the abnormal CEO compensation around the Index inclusion. We document a positive association between earnings management and abnormal CEO compensation, particularly abnormal equity-based compensation. Overall, the evidences are consistent with the view that CEO has incentive to boost the reported earnings to join the S&P 500 Index, in an attempt to increase their compensation.
Kuo et al. (Mon,) studied this question.