Credit Rating Purchases and S&P 500 Index Membership Decisions

S&P 500 is commonly used in empirical finance and macroeconomics as a measure of overall capital market sentiment, and the associated VIX is taken as an indicator of economic uncertainty. While both assume that the S&P 500 index is objectively constructed, we show that its membership decisions have a nontrivial amount of discretion unexplained by its published methodology. Importantly, 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, openings in index membership tend to motivate firms to purchase more S&P ratings. This is also confirmed by an event study of a 2002 membership rule change. These patterns raise concerns over potential governance issues.