A trader works on the floor of the New York Stock Exchange
A trader works on the floor of the New York Stock Exchange. In general, S&P 500 constituents must have a market value of at least $13.1bn © Bloomberg

Entry into the S&P 500, the benchmark index of large US stocks, could be influenced by whether companies buy other services from the index’s parent company S&P Global, according to an academic study.

A working paper published by the National Bureau of Economic Research on Monday reports that buying credit ratings from S&P Global Ratings has a statistically significant impact on the likelihood of being added to the S&P 500. It claimed to have found evidence that firms consciously requested ratings to take advantage of the relationship.

S&P Global said the paper, which has not yet been peer-reviewed, was “flawed”, but did not cite any specific examples.

The academic report, titled Is Stock Index Membership for Sale? and written by a trio of economists and statisticians from the National University of Australia and Columbia University in New York, said several data patterns “suggest that the discretion is often exercised in a way that encourages firms to buy fee-based services from the S&P”.

Firms with a chance of entering the index were found to be more likely to pay for ratings when a gap appeared in the index, such as through a merger between two existing members. At the same time, there was a sharp drop in ratings purchases by foreign firms when S&P changed its rules to make them ineligible to join.

The New York-based company has long made clear that an element of discretion is involved in choosing which companies are included in the S&P 500. Any suggestion that the decision making process is influenced by commercial considerations could threaten its reputation as an authoritative snapshot of large-cap publicly traded American companies. More than $13tn of assets directly track or are benchmarked against the index.

“S&P Dow Jones Indices and S&P Global Ratings are separate businesses with policies and procedures to ensure they are operated independently of one another,” S&P Global said in a statement. “Our index governance segregates analytical and commercial activities to protect the integrity of our indices. For 64 years, the S&P 500 has provided an independent, transparent and objective benchmark of the US large cap equity market.”

In general, S&P 500 constituents must have a market value of at least $13.1bn and meet minimum standards for measures such as free float and long-term profitability. The study found that in practice, about a third of additions to the index between 2015 and 2018 violated at least one selection criterion.

One person close to S&P suggested that it was “not a surprise that many of the largest corporations have also purchased ratings”. Many companies need debt ratings before they issue bonds, for instance.

The researchers noted that: “To rule out the possibility that firms buy more ratings merely because they wish to issue more bonds for expansion, rather than to curry favour with S&P, we control for both their bond issues and purchase of Moody’s ratings in all regressions.”

The report added that new index members that missed some of the selection criteria demonstrated a worse financial performance and worse stock price performance in subsequent years compared with additions that did meet the criteria, as well as stocks that met all the criteria but were not added to the index.

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