Index Membership and Capital Structure: International Evidence
66 Pages Posted: 30 Oct 2017 Last revised: 21 Apr 2019
Date Written: April 19, 2019
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 its debt supply and financing. Firms added to an index are covered by more equity analysts and mentioned more frequently in the media, resulting in greater information production. Consequently, firms benefit from lower yield spreads on newly issued debt and increased bond liquidity. Accordingly, such firms increase their leverage by about two percentage points. The leverage response is primarily in the more information-sensitive public debt market with firms issuing more public debt but not more bank debt.
Keywords: index membership, leverage, debt supply, cost of debt, capital structure
JEL Classification: G14, G15, G32
Suggested Citation: Suggested Citation