Index Creation, Information, and External Finance
68 Pages Posted: 30 Oct 2017 Last revised: 27 Apr 2021
Date Written: April 27, 2021
We use the formation of new equity indexes and changes to index methodology to examine how shocks to firms' information environment affect their financing decisions. Firms added to an index are covered by more equity analysts, have greater news coverage, increased stock and bond liquidity, and lower yield spreads on newly issued debt. Treatment firms in our study increase their leverage by about two percentage points relative to control firms. This response is primarily in the more information-sensitive public debt market. We further show that the leverage response to index membership is more pronounced in countries with greater earnings opacity and poor disclosure standards. Our findings suggest that firms experiencing positive shocks to their information environment have improved access to external financing, primarily public debt.
Keywords: index membership, leverage, debt supply, cost of debt, capital structure
JEL Classification: G14, G15, G32
Suggested Citation: Suggested Citation