Passive bond funds provide predictable demand for newly issued corporate bonds included in popular indices. By issuing index-eligible bonds, firms can take advantage of this passive demand and improve bond characteristics unrelated to index eligibility. To this end, firms issue a disproportionate number of bonds with face value just sufficient to be included in major bond indices. Higher passive demand is associated with larger bonds. Following an increase in the index size threshold, some firms withdraw from the bond market while others respond by issuing larger bonds at the new threshold. This paper was accepted by Lukas Schmid, finance. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2023.01999 .
Dathan et al. (Fri,) studied this question.
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