Index Creation, Information, and External Finance
60 Pages Posted: 30 Oct 2017 Last revised: 13 May 2020
Date Written: May 12, 2020
We use the formation of new equity indexes and changes to index methodology as a setting to examine how shocks to a firm's information environment affect the debt supply and financing of firms. Firms added to an index are covered by more equity analysts and have greater news coverage, resulting in higher information production. Consequently, firms benefit from lower yield spreads on newly issued debt and increased bond liquidity. Treatment firms increase their leverage by about two percentage points relative to control firms. The response is primarily in the more information-sensitive public debt market, with firms issuing more public debt.
Keywords: index membership, leverage, debt supply, cost of debt, capital structure
JEL Classification: G14, G15, G32
Suggested Citation: Suggested Citation