Strategic Adjustment of Capital Structure: Evidence from S&P 500 Index Additions

The effect of option listing on financing decisions

“…Net equity issue increases setting, firms have strong incentives for being listed on the option market due to the benefits of listing (e.g., more analyst or news coverage, lower cost of capital, greater innovation and investment activities) as the literature has shown. Consequently, firms might decrease their leverage before the option listing to boost the potential for being listed as observed in Figure 1 (for findings on additional events on the S&P 500 index, see Hong et al, 2021). If this is the case, our setting can be sensitive to the Ashenfelter dip, which overstates the impact of option listing on capital structure in the before-after comparison as Heckman and Smith (1999) warn.…”

“…Second, we contribute to the literature on the effects of index listing events by showing the effect of option listing on corporate financing decisions. Previous literature on the S&P 500 index revisions reports no change in equity issuance despite a decrease in the cost of equity but an increase in debt issuance given no significant changes in the cost of debt (Baran & King, 2012; Chen et al., 2004; Hong et al., 2021). Our findings present several interesting differences from the S&P 500 index literature.…”