Free-Float Adjustment in Global Equities: A Two-Decade Review
Research Paper
January 10, 2024
Preview
Changes in a company's free float provide important information for investors. An increase in free float can potentially lead to more favorable stock characteristics such as improved liquidity and lower volatility. Historically, investors have responded positively to companies that increased their free float (leading to a positive price impact) and reacted negatively to those that decreased it (driving a negative price impact).
On average, roughly 32% of companies in the MSCI ACWI IMI universe experienced a modification in the foreign inclusion factor (FIF, a proxy for free float) every year between May 2002 and August 2023. The instances of FIF changes were well distributed across countries and market segments such as developed and emerging markets. We group companies based on their changes in FIF and calculate the average stock-specific returns for each group.
Our analysis found a nearly linear relationship between an FIF change and its corresponding price impact, with a larger price impact from FIF increases than FIF decreases.
Price impact of changes in the foreign inclusion factor
Data period is from June 2002 through August 2023. Securities are grouped by the extent of change in the FIF. The widths of the FIF change bins are not equal, with the larger widths at the extremities of the distribution. The difference in width is to account for sufficient representation of securities within each bin. Stock-specific returns correspond to the same month as when the FIF changes occurred and are based on the MSCI global equity risk model (EFMGEMLT). Stock-specific returns in this context pertain to the portion of a security's return that cannot be explained by the company's exposure to any risk factor, such as country, industry or style, and is idiosyncratic to the company in our risk models.
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