Index Creation, Benchmarking, and External Finance
78 Pages Posted: 30 Oct 2017 Last revised: 13 Jul 2022
Date Written: July 11, 2022
We study the impact of index additions on firm financing by constructing a worldwide sample of new index launches and changes to index methodologies. Index additions improve the credit quality of firms and reduce yield spreads. Firms respond by issuing public debt and increasing their leverage. Index firms do not increase their equity issuances, but when they do issue equity, their announcement returns are significantly more positive. Furthermore, firms' equity issuances are more responsive to increases in distress risk once they are in an index. Our results support the view that changes in inelastic demand for a firm's shares reduce distress risk and contribute to more significant debt issuances.
Keywords: index membership, leverage, debt supply, cost of debt, capital structure
JEL Classification: G14, G15, G32
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