Not Worthy
The researchers see potential economic downsides for those tracking the S&P 500 if less eligible firms are added to the gauge. Companies that edge out better-qualified peers to enter the index fare worse in subsequent years, the paper said.
Without naming any specific examples, it said that such firms see an average a 14.6% drop in profitability and a 37% decline in return on assets in the four years after entry compared to similar stocks that remain excluded.
They also invest about 13% more in the two years after entry, echoing concerns that entry into an index loosens shareholder shackles over corporate decisions that may prove costly.
“Their relative advantage in cost of capital and investment suggests possible misallocation of resources in the economy induced by S&P’s discretion in its index membership decisions,” the paper said.
The U.S.-based NBER is a non-profit network of economists that regularly circulates working papers to foster debate.
Li and Liu are lecturers of finance at ANU. Wei is a professor of finance and economics at Columbia who has served as chief economist of the Asian Development Bank.
This article was provided by Bloomberg News.