Index Creation, Information, and External Finance

60 Pages Posted: 30 Oct 2017 Last revised: 13 May 2020

See all articles by Vidhan K. Goyal

Vidhan K. Goyal

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Daniel Urban

Erasmus University Rotterdam (EUR) - Department of Business Economics

Wenting Zhao

Technische Universität München (TUM)

Date Written: May 12, 2020

Abstract

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

Goyal, Vidhan K. and Urban, Daniel and Zhao, Wenting, Index Creation, Information, and External Finance (May 12, 2020). Available at SSRN: https://ssrn.com/abstract=3060392 or http://dx.doi.org/10.2139/ssrn.3060392

Vidhan K. Goyal

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong
852-2358-7678 (Phone)
852-2358-1749 (Fax)

HOME PAGE: http://www.vidhangoyal.com

Daniel Urban (Contact Author)

Erasmus University Rotterdam (EUR) - Department of Business Economics ( email )

Netherlands

Wenting Zhao

Technische Universität München (TUM) ( email )

Arcisstrasse 21
Munich, DE 80333
Germany

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