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Firms ‘gaming’ entry into FTSE 100 gain market advantage

08 January 2018

Up to five per cent of firms entering the FTSE 100 have gamed the system to get in, according to new research.

Membership of this exclusive index can mean increased investor interest and higher executive pay.

Analysing market data from 2005 to 2012, researchers found companies within ten places of entering the exclusive index were abnormally likely to make large share issues.

The actions were part of long-term strategic campaigns to increase their market capitalisation to be eligible for entry.

While ‘gaming’ the system does not infringe current rules, the findings raise questions around how membership can be manipulated by companies pursuing market advantage.

The findings also come as the role of stock market indexes face increasing scrutiny, with the growing influence of index funds, active versus passive fund managers, and the prevalence of ‘closet’ tracking all under examination.

Jo Danbolt, Baillie Gifford Professor of Finance at University of Edinburgh Business School carried out the study with Ian Hirst and Edward Jones from Heriot-Watt University. He said:

“Market capitalisation is naturally highly volatile. Some companies actively seeking FTSE entry will be frustrated by falls in their share prices. Others will find their efforts unnecessary because their share price rises.

“Attempts to game the system have very uncertain results and may have unwelcome side-effects.”

The research is published in the British Accounting Review.

Image Source: @iStockphoto/Juergen Sack