Index membership and small firm financing

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

This paper investigates the extent to which index membership affects small firm financing. Using a regression discontinuity specification around the lower cutoff of the Russell 2000 small-cap index, we find that index membership causes small firms to transition away from bank financing in favor of seasoned equity offerings. These effects are concentrated in the year following Russell 2000 additions and do not reverse immediately upon deletions. Liquidity, the elasticity of demand for equity, and analyst coverage also significantly increase following Russell 2000 additions but do not significantly decrease following deletions. Finally, firms added to the Russell 2000 obtain lower spreads and have fewer covenants on the bank loans that they do initiate. Our findings are consistent with index membership mitigating the financing frictions of small firms by improving their information environment through increased investor awareness.

Original languageEnglish (US)
Pages (from-to)4156-4178
Number of pages23
JournalManagement Science
Volume65
Issue number9
DOIs
StatePublished - Jan 1 2019

Fingerprint

Financing
Small firms
Analyst coverage
Bank loans
Bank financing
Equity
Covenant
Friction
Information environment
Investors
Seasoned equity offerings
Elasticity of demand
Regression discontinuity
Liquidity

All Science Journal Classification (ASJC) codes

  • Strategy and Management
  • Management Science and Operations Research

Cite this

Cao, Charles ; Gustafson, Matthew ; Velthuis, Raisa. / Index membership and small firm financing. In: Management Science. 2019 ; Vol. 65, No. 9. pp. 4156-4178.
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Index membership and small firm financing. / Cao, Charles; Gustafson, Matthew; Velthuis, Raisa.

In: Management Science, Vol. 65, No. 9, 01.01.2019, p. 4156-4178.

Research output: Contribution to journalArticle

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