Is S&P 500 Membership for Sale?

By Jirapong Manustrong from

3 minute read

Regarded as the performance barometer for large, U.S.-listed companies, Standard and Poor’s S&P 500 Index is one of the world’s most closely followed equity market benchmarks.

While Standard and Poor’s use a number of financial performance-based rules to guide decisions around additions to, and deletions from, the Index, new research from The Australian National University (ANU) and Columbia University suggests they also exercise a “nontrivial” degree of discretion when making Index composition decisions. 

Written by Dr Kun Li (ANU), Dr Xin (Kelly) Liu (ANU) and Dr Shang Jin Wei (Columbia), the National Bureau of Economic Research working paper Is Stock Index Membership for Sale? suggests that Standard and Poor’s exercise this discretion in a way that encourages firms to buy fee-based services from them.

In particular, analysis reveals that firms buying credit ratings from Standard and Poor’s have a significantly higher likelihood of being added to their coveted Index than firms purchasing ratings from Moody’s, regardless of whether they meet all the criteria for inclusion. 

Similarly, it reports that, when compared to the London-based equity index Russell 1000, “membership decisions, additions to S&P500 exhibit a substantially bigger gap between published rules and actual decisions…S&P appears to deviate from its published criteria in its decisions on adding firms to its index much more than Russell does.”

Taken together, the paper further evidences the extraordinary power of index providers in modern markets, and the often negative consequences of discretion-based index-membership decisions.

The full working paper is available here.

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