We examine the capital structure of firms that are newly added to the S&P 500 index. Leverage gradually decreases during the two-year pre-addition period and then increases during the two-year post-addition period, resulting in a U-shaped trend. This trend is more pronounced in financially weak firms and firms facing intense competition for index addition and is established primarily by modifying debt policies. A similar U-shaped leverage trend exists among firms that compete for addition to the index but not among firms that do not compete for addition that are otherwise similar to added firms. The leverage trend cannot be explained by mechanical mean reversion of leverage or changes in the cost of capital. The overall results are consistent with firms' strategically reducing leverage to improve financial health temporarily prior to index revisions.
Keywords: S&P 500 index, capital structure
JEL classification: G30, G32
