Index Membership and Capital Structure: International Evidence

62 Pages Posted: 30 Oct 2017 Last revised: 25 Jan 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: January 23, 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 more 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 but not more bank 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 Membership and Capital Structure: International Evidence (January 23, 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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