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The Dow Jones Industrial Average (DJIA) is arguably the world’s most widely watch stock market index. It is calculated as a simple unweighted arithmetic mean or average. Previous papers noted several flaws with the calculation which limits its usefulness as an overall or broad market gauge. Those flaws include its small sample size and it use of the summed market prices, not the summed market values of the component stocks. There is also the problem of the necessity to revise the divisor whenever stock dividends and splits occur. This brief paper will examine the “divisor problem” in far more detail than the earlier papers. The paper will first review the calculation of the average and briefly review prior discussed flaws. It will then explore the large number of divisor revisions during the period 1926, when the current calculation was constructed, through 2018. These changes have been the result of numerous stock splits and stock dividends over time. The direct result of all these divisor changes has been the steady and persistent decline in the meaning of a point change. It will be argued that, sooner or later, the calculation of the Dow may have to be changed.
RICHARD D. GRITTA, BRIAN ADAMS. (2019) Whither Goes the DJIA? The Problem of the Divisor Over Time and the Need to Change the Calculation of the Index., International Review of Management and Business Research, Volume 8, Issue 3.
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