Is Stock Index Membership for Sale?

51 Pages Posted: 11 Oct 2021 Last revised: 18 Nov 2021

See all articles by Kun Li

Kun Li

Australian National University (ANU)

Xin Liu

Research School of Finance, Actuarial Studies & Applied Statistics, CBE, Australian National University

Shang-Jin Wei

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: October 2021

Abstract

While major stock market indices are followed by large monetary investments, we document that membership decisions for S&P 500 have a nontrivial amount of discretion. We show that firms’ purchases of S&P ratings appear to improve their chance of entering the index (but purchases of Moody’s ratings do not). Furthermore, firms tend to purchase more S&P ratings when there are openings in the index membership. Such a pattern is also confirmed by an event study that explores a rule change on index membership in 2002. Finally, discretionary additions exhibit subsequent deterioration in financial performance relative to rules-based additions.

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Suggested Citation

Li, Kun and Liu, Xin and Wei, Shang-Jin, Is Stock Index Membership for Sale? (October 2021). NBER Working Paper No. w29365, Available at SSRN: https://ssrn.com/abstract=3940053 or http://dx.doi.org/10.2139/ssrn.3940053

Kun Li (Contact Author)

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

Xin Liu

Research School of Finance, Actuarial Studies & Applied Statistics, CBE, Australian National University ( email )

Kingsley Street
acton, ACT 0200
Australia

Shang-Jin Wei

Columbia University - Columbia Business School, Finance ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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