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Index Membership and Capital Structure: International Evidence

61 Pages Posted: 30 Oct 2017  

Vidhan K. Goyal

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

Daniel Urban

Technical University of Munich

Wenting Zhao

Technische Universität München (TUM)

Date Written: October 27, 2017

Abstract

How much do shocks to the information environment in equity markets matter for debt supply and the financing of firms? We find that the use of debt increases by about two to three percentage points following exogenous additions of stocks to an index. The leverage response is primarily in public debt markets: Borrowing costs in these markets decrease, while bond liquidity increases. These results suggest that index additions affect leverage because an increase in public information reduces information asymmetries for lenders and increases their willingness to buy information-sensitive debt. Indeed, stocks added to an index are followed by more equity analysts. Overall, we support the view that information production in equity markets spills over into debt markets.

Keywords: index membership, investor awareness, debt supply, capital structure

JEL Classification: G14, G15, G32

Suggested Citation

Goyal, Vidhan K. and Urban, Daniel and Zhao, Wenting, Index Membership and Capital Structure: International Evidence (October 27, 2017). Available at SSRN: https://ssrn.com/abstract=3060392

Vidhan 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)

Technical University of Munich ( email )

Arcisstrasse 21
Munich, 80333
Germany

HOME PAGE: http://www.danielurban.org

Wenting Zhao

Technische Universität München (TUM) ( email )

Arcisstrasse 21
Munich, 80333
Germany

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