Research

Abstract

Firms exploit inelastic demand during index rebalancing events by increasing the supply of shares. I introduce a novel measure of inelastic demand based on index funds with low tracking errors against their benchmark. In the case of the S&P 500, firms increase the number of split-adjusted shares outstanding by approximately 1% around the day of inclusion. Using S&P 500 inclusions as an instrument for the demand of indexers, a 1% increase in inelastic demand results in a 0.94% increase in shares issued. I use my measure of inelastic demand in conjunction with S&P 500 inclusions to estimate a price elasticity of demand between -1.2 and -0.5. In light of the documented increase in share issuance these should be interpreted as upper bounds on the price elasticity of demand.

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Abstract

When Federal Reserve districts experience high inflation but lack voting rights to influence FOMC decisions, Federal Reserve Banks reduce the amount of credit extended via the discount window (DW). The identification strategy is based on the exogenous rotation of voting rights among Reserve Banks and on within borrower-time and district-time variations in DW loans and Federal Home Loan Bank (FHLB) loans, implying that factors related to changes in local demand for credit or changes in borrower characteristics cannot drive the results. Our findings suggest the existence of local monetary policy (LMP) executed by the Federal Reserve Banks.

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Abstract

Candidates for S&P 500 inclusion have large incentives to secure membership into the index. Among these firms, a 1% increase in the likelihood of addition leads to an 8% relative increase in net share issuance and a 3% decrease in dividend distributions. These results are consistent with behavior aimed at improving financial health and increasing market capitalization. This evidence supports the hypothesis that firms alter their capital structure and dividend policy in hopes of index inclusion. Investment decisions are unaffected. Firms that engage in this type of behavior experience a 0.75% decrease in ROA following index addition.