Do Financial Ratios Affect Index Constitution?

  •  Selahattin Guris    
  •  Irem Sacildi    
  •  Elif Genc    


The inclusion or exclusion of a stock from an index is important with regard to be considered as a positive signal for both institutional and individual investors. The index inclusion reflects a positive situation about the quality, risks and possible future return of the stock. Financial ratios reflect the financial solidity of the enterprise. Starting from this statement, in this study we aim to research whether financial ratios have any effect on the inclusion of the stock in the Istanbul Stock Exchange (BIST 100) index. The research on which ratios and ratio groups are effective on the stock inclusion in the index has been anaylzed by using panel logit model. It has been noted that, among the models, the one with the most significant impact on inclusion in or exclusion from the index are the activity ratio variables. This result indicates that the impact of the allocation of resource financing on the probabilities of being included in/excluded from the index is too strong with positive and negative effects of debts on the operating profit. Besides, in order to illustrate the success of the estimated results obtained from the models, the probability of inclusion or exclusion of each stock in the index is determined. The empirical results, on the basis of the financial solidity of enterprises has a significant impact on the inclusion in/exclusion from the index, show that the financial ratios are effective - indirectly- on the inclusion/exclusion.

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