When Firms Enter Stock Indexes, They Borrow More

When a company is added to a major stock index, billions of dollars can flow into its shares almost overnight. But does index inclusion change anything inside the firm itself?

Our research suggests that it does.

Analyzing nearly 200 index inclusion events across 21 countries, we find that firms entering indexes increase their debt issuance and become more leveraged, while equity issuance remains largely unchanged.

Why does this happen? Index inclusion raises a firm’s visibility and expands its investor base. Greater attention appears to improve conditions in debt markets—enhancing liquidity and lowering borrowing costs. Firms respond by issuing more debt.

The findings highlight an important implication of the rise of passive investing: indexes do more than track markets—they can also influence how firms finance themselves.

Index inclusion lowers borrowing costs and leads firms to issue more debt.