Country classification of companies is complex

We have previously discussed the basic elements of index construction. One ingredient is to find out which country the stock belongs to.

What makes stocks “American”?

At a basic level, finding a company’s address seems like a simple matter. Many companies trade their shares at the same location as their headquarters and incorporation.

For many index providers, this is the first real test they use.

However, these days, many companies operate internationally and are listed in multiple countries, making it more difficult to know which country a company belongs to.

Can you tell by looking at an American company?

Most index providers have special rules to account for less obvious situations, such as:

• Where are the assets and profits?
• Where the shareholders or management are located.
• If the company files financial reports with the Securities and Exchange Commission as a U.S. or foreign issuer.

These factors are then often ranked or combined so that a company cannot qualify for two countries (same stock) at the same time.

There are 29 companies in the S&P 500 that are probably American.

Case in point: There are 29 companies in the S&P 500 that are supposedly “American” but do not have an exchange, headquarters, or incorporation (the S&P’s main domicile elements). Global address policy) in the United States, they are all listed in Table 1. I’ll also include additional columns to show you how to do it. S&P rules Expand to include almost all of the other address elements included above (purple header). The “fine print” in the last header line provides details about how the S&P rules are applied.

Table 1: “Foreign” companies in the S&P 500

Click to view enlarged image

The following can be seen from the table:

• shades of pink Not all stocks will pass all of the “US” tests, but all stocks will pass most of the tests.
• light green hue It also indicates that special rules exist for some specific countries. S&P’s rules specifically recognize that companies headquartered or incorporated in other countries may more readily be considered U.S. companies because of their historical incorporation.

Some companies use 10-Ks (U.S. SEC filings) to disclose additional details about the locations of their employees, management, or customers.

Ultimately, however, S&P also reserves the right to consider “any other factors deemed relevant” by the index committee.

So what Table 1 really shows is that in the real world, determining a company’s country is complex.

This all may be about to change for S&P

Published by S&P in September 2024 proposed changes to their domicile policy.

The two important changes being proposed are:

• Incorporation becomes much more important.
• major list up will be excluded.

In addition, four additional quadratic factors must be considered in these “complex” cases.

1. Internal meeting location
2. Secondary listing
3. reporting currency
4. Company history

A simple way to think about new rules is shown in Figure 1 below.

• First, let’s test the main factors. (This no longer includes “primary” listings, but still requires liquid US stocks).
• If one of these three tests fails The purple “secondary factors” are brought in, including the new factor in light purple.
• if it is not conclusivethe new rules propose that embedding will be the main determining factor (gray square).

Figure 1: Proposed changes to S&P’s global residency policy

This will make it even more difficult for companies with international founders

We know it’s easy to incorporate and collect clear data points. But that’s not the best way to define an “American company.”

There is often more to be said about where a company’s founders grew up than where a company’s business or investor base is today.

For companies with foreign founders, this could significantly limit future access to U.S. capital markets and institutional investors. For the rest, this is just a headwind for U.S. capital markets, making listings less attractive and potentially slowing IPOs and, in turn, U.S. economic growth.

The important thing is that you have time to comment.

S&P is consultation using the form here. S&P has also set a short deadline for adoption, and comments are scheduled to be closed. October 31, 2024and this rule could be adopted as early as December 1, 2024.

Nicole Torskiy, Senior Economic Research Specialist, contributed to this article.