Index Creation, Benchmarking, and External Finance

78 Pages Posted: 30 Oct 2017 Last revised: 13 Jul 2022

See all articles by Vidhan K. Goyal

Vidhan K. Goyal

Hong Kong University of Science & Technology (HKUST) - Department of Finance; HKUST; 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: July 11, 2022

Abstract

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

Suggested Citation

Goyal, Vidhan K. and Goyal, Vidhan K. and Urban, Daniel and Zhao, Wenting, Index Creation, Benchmarking, and External Finance (July 11, 2022). 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

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

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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