To Be or Not to Be…selected for the S&P 500: Cost of Debt Implications

Abstract

We examine changes to a firm’s cost of debt after the firm is included to, or removed from, the S&P 500 index. The firm’s cost of debt decreases upon inclusion into the S&P 500. Furthermore, the cost of debt increases after removal from the index. To explain these findings, we posit that information asymmetry decreases (increases) upon inclusion (exclusion), thus altering the cost of debt. This study contributes novel insights to the cost of debt and index composition literature.

Keywords: Cost of Debt, S&P 500, Index Composition