When the working-paper version of our study first circulated in 2021, S&P strongly objected to our interpretation, emphasizing that its index committee operates independently of its ratings business, with the two separated by a “Chinese wall”. According to the company, the index team does not communicate with ratings analysts about firm-level decisions, and therefore, index inclusion cannot be influenced by ratings-related revenue. While we take this claim seriously, the data reveal patterns that are difficult to reconcile with full separation between S&P’s index and ratings divisions.
Few benchmarks matter more to financial investors than the S&P 500. Trillions of dollars track it directly, and many more are evaluated against it. Inclusion often boosts a firm’s stock price, lowers its cost of capital, and confers prestige. Many corporate boards even tie executive compensation to performance relative to the index.
Given the S&P 500’s influence, index membership should be determined objectively and transparently. Yet as a recently published research paper by Kun Li, Kelly Liu, and me shows, the process for adding companies allows for considerable discretion, potentially creating incentives for firms to purchase S&P’s credit ratings in hopes of improving their chances of getting into the index. This is suggested by a key finding: firms that recently obtained an S&P rating were more likely to be added to the S&P 500 than those that purchased ratings from Moody’s.
