Strategic adjustment of capital structure: Evidence from firms newly added to the S&P 500 index

55 Pages Posted: 25 Mar 2019 Last revised: 8 Oct 2021

See all articles by Eunpyo Hong

Eunpyo Hong

George Washington University

Min Hwang

George Washington University - Department of Finance

Jiyoon Lee

Yonsei University

Date Written: October 8, 2021

Abstract

We examine the capital structure of firms that are newly added to the S&P 500 index. Leverage gradually decreases during the two-year pre-addition period and then increases during the two-year post-addition period, resulting in a U-shaped trend. This trend is more pronounced in financially weak firms and firms facing intense competition for index addition. A similar U-shaped leverage trend exists among firms that compete for addition to the index but not among firms that do not compete for addition that are otherwise similar to added firms. The sharp shift in the direction of the leverage trend after addition is attributable mainly to increases in debt issuance and cannot be explained by mechanical mean reversion of leverage or changes in the cost of capital. The overall results are consistent with firms' strategically reducing leverage to improve financial health temporarily prior to index revisions.

Keywords: S&P 500 index, capital structure

JEL Classification: G30, G32

Suggested Citation

Hong, Eunpyo and Hwang, Min and Lee, Jiyoon, Strategic adjustment of capital structure: Evidence from firms newly added to the S&P 500 index (October 8, 2021). Available at SSRN: https://ssrn.com/abstract=3263539 or http://dx.doi.org/10.2139/ssrn.3263539

Eunpyo Hong

George Washington University ( email )

2023 G Street
Washington, DC 20052
United States

Min Hwang

George Washington University - Department of Finance ( email )

2023 G Street
Washington, DC 20052
United States

Jiyoon Lee (Contact Author)

Yonsei University ( email )

Seoul
Korea, Republic of (South Korea)

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