Index Creation, Information, and External Finance

68 Pages Posted: 30 Oct 2017 Last revised: 27 Apr 2021

See all articles by Vidhan K. Goyal

Vidhan K. Goyal

HKUST; Hong Kong University of Science & Technology (HKUST) - Department of Finance; 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: April 27, 2021

Abstract

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

Goyal, Vidhan K. and Urban, Daniel and Zhao, Wenting, Index Creation, Information, and External Finance (April 27, 2021). Available at SSRN: https://ssrn.com/abstract=3060392 or http://dx.doi.org/10.2139/ssrn.3060392

Vidhan K. Goyal

HKUST ( email )

Clear Water Bay
Kowloon
Hong Kong
23587678 (Phone)

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

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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