For some listed companies, becoming a member of a major stock index is like joining an exclusive club, which is a recognition of years of hard work. But this week a scholar put forward the hypothesis of another way of entry: a shortcut involving cash.

A sort of work documents According to a report issued by the National Bureau of Economic Research, companies that purchase credit ratings from Standard & Poor’s global ratings business have a statistically significant impact on the likelihood of being included in the Standard & Poor’s 500 Index. The Standard & Poor’s 500 Index is managed by another subsidiary, Standard & Poor’s The Jones Index, the benchmark index of US blue-chip stocks operated by Dow Jones Indices.

Standard & Poor’s firmly denied the findings of the paper entitled “Is stock index membership sold?”, calling it “defective.” It stated that its two departments “are independent businesses with policies and procedures to ensure that they operate independently of each other.”

Nevertheless, the report has drawn attention to the dual role of Standard & Poor’s. As Wei Shangjin, a professor of finance at Columbia University and one of the co-authors of the NBER paper, said, “The objectivity of major market indexes is extremely important.”

Credit rating agencies have a huge impact. It has been widely criticized for its role in the 2008 financial crisis. It has given a high rating to the risk pool of professional loans, but since then it has been the top rating to help debt investors judge the company’s creditworthiness for more than a decade. One of the company.

The Standard & Poor’s 500 Index is one of the world’s most watched and prestigious indexes. Its history can be traced back to the soaring U.S. stock market in the 1920s. Approximately $13.5 trillion in assets are directly tracked or benchmarked against the S&P 500, making index compilers the traffic police who determine the flow of investors’ funds.

Standard & Poor’s recognizes the risk that anything will shake investor confidence in stock benchmarks.

“For me, I think this is a real opportunity [S&P 500] The committee sets more rules to make it more transparent like other indexes. This will help them avoid such assertions,” said Laurence Black, a former index designer who now runs The Index Standard, a professional consulting firm.

S&P Dow Jones separates its analysis and business teams to protect the integrity of its indexes. The business is also a joint venture between S&P Global and the American derivatives exchange CME Group, although S&P Global owns 73% of the shares.

David Blitzer, who led the Standard & Poor’s Index Committee for more than 20 years before 2019, said that buying ratings is unlikely to have any impact on who joins the index.

“When I was the chairman of the index committee, I was prohibited from talking to anyone rated by Standard & Poor’s without the presence of legal counsel… Even if the company’s chief financial officer buys more ratings, the index committee will never know ,”He said.

The newspaper believes that many companies “seem to believe in buying Standard & Poor’s ratings.” .. To help them be added to the index.” Scholars analyzed rating purchase information from Standard & Poor’s own database, as well as data from other vendors such as Moody’s and the University of Chicago Securities Price Research Center.

Scholars have found that when the index is known to have vacancies, such as when two existing members agree to merge, potential candidates to join the S&P 500 will increase purchases of S&P ratings. At the same time, when Standard & Poor’s changed its rules in 2002 to prevent foreign companies from joining the index, the purchases of foreign companies dropped sharply. In each case, Moody’s, Standard & Poor’s biggest competitor, did not have similar changes in ratings purchases. Standard & Poor’s countered that the paper “contains many misleading and inaccurate statements about the S&P 500 index, its methodology and eligibility rules, and the impact of index inclusion.”

Standard & Poor’s competes with competitors such as MSCI, FTSE Russell, and Morningstar to provide investors with what they believe is a “more true” reflection of the stock market. According to data from Burton Taylor International Consulting, this is an industry valued at more than 4 billion U.S. dollars per year. Standard & Poor’s 25% market share makes it slightly higher than MSCI and FTSE Russell. For S&P Global, the index business only accounts for 13% of its revenue; credit ratings account for half.

David Blitzer, former chairman of S&P Dow Jones Indices

David Blitzer, former chairman of S&P Dow Jones Indices © Jin Lee/Bloomberg

Experts say that the S&P 500’s unique method of selecting its constituent stocks and cautious factors make it particularly vulnerable to suspicion or misunderstanding.

Index Standard’s Black stated that the S&P 500 index is “a real anomaly compared to other benchmark indexes,” such as the FTSE Russell 1000 Index, which is almost entirely based on market capitalization.

Although largely regarded as representative of the largest companies in the United States, the Standard & Poor’s 500 Index does not include the 500 largest stocks in the US market.

Instead, it includes what S&P Dow Jones calls “leading companies from leading industries.” Generally speaking, the company’s market value needs to be at least 13 billion U.S. dollars and meet the minimum standards of profitability and liquidity. Ultimately, membership is determined by the Standard & Poor’s Dow Jones Indices Full-time Employee Committee, which meets once a month. It uses a so-called “informed approach” that allows quick adjustments when the company’s financial situation or overall market conditions change, it said.

“This does illustrate the problem they are experiencing. Although their opacity has reached this level, there will always be doubts,” said Gareth Parker, chairman of Morningstar’s UK subsidiary Moorgate Benchmarks.

The NBER paper emphasized the degree of discretion used by the Standard & Poor’s Index Committee. It stated that about one-third of the new additions between 2015 and 2018 failed to meet at least one standard announced by Standard & Poor’s, although hundreds of alternative candidates more clearly met the rules. It added that these “discretionary” additions tended to perform worse after joining the index compared to “rule-based” entrants.

Standard & Poor’s stated that it is difficult to predict which companies will be added to the index is one of the benefits of the committee system, which helps prevent hedge funds from trading based on expected changes before the announcement.

It also downplays the impact of entering its index on the company, arguing that Recent report The increase in liquidity resulted in a “structural decline” in the additional share price gains generated after joining the S&P 500 index.

Even so, the findings of the investigation may still prompt US regulators to take further action. Standard & Poor’s has repeatedly been criticized for potential conflicts of interest in its rating business. In 2015, it paid $1.4 billion settlement Before the financial crisis broke out in 2008, the US Department of Justice was accused of overstating mortgage derivatives to win the business of competitors. The SEC also accused it of “a series of violations of federal securities laws,” which lasted for several years.

The authority of the US regulator in managing benchmarks is different from that of the UK or the EU. Despite this, they still retain some “backdoor” supervision capabilities because they supervise financial products and their prospectuses. Industry practitioners say that their scrutiny of index providers has been increasing in recent years.

“The SEC has always been very concerned about quality and methods and conflicts of interest. This has indeed further promoted benchmarking in the United States,” said Parker of Moorgate. The US Securities and Exchange Commission declined to comment.

When asked whether Standard & Poor’s can increase confidence in its products by providing more transparency, a senior employee said that “we may have done our best.”

Blitzer said that this paper “will annoy some of my former colleagues”, but he hopes that discussions about it will “disappear” in a short time. If not, Standard & Poor’s will have to fight back.

“The Standard & Poor’s 500 index lives on its reputation-you and I can build an index of 500 stocks this afternoon, but we won’t have the S&P brand name, reputation and history,” Blitzer said.

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