How firms respond to being rated
By: Aaron K. Chatterji, Michael W. Toffel
Contributors: Toffel, Michael W.; Harvard Business School
Edition: 2nd rev.
Series: Working paper / Harvard Business School -- 08-025; Working paper (Harvard Business School) -- 08-025
Publisher: Harvard Business School
Published: 2008
Place of publication: Boston]
Language: eng
Number of pages: 39
Description: While many independent rating systems are designed primarily to help buyers overcome information asymmetries when making purchasing decisions, we investigate whether these same ratings might also influence the companies being rated. We focus on corporate environmental ratings, the primary purpose of which is to help investors select "socially responsible," and avoid "socially irresponsible," companies. We hypothesize that company ratings are particularly likely to spur responses by firms that receive poor ratings, especially those that face lower cost opportunities to improve and that operate in highly regulated industries. Our empirical analysis examines how nearly 600 firms in the United States respond to corporate environmental ratings issued by a prominent independent social rating agency, and avoids selection issues by taking advantage of a natural experiment that arose when the agency expanded the scope of its ratings. We find empirical support for our hypotheses, and present implications for managers of rated companies and of private and public rating agencies. While negative ratings may "shame" firms that are performing poorly, the threat of regulatory action and the presence of "low hanging fruit" are important drivers of how firms respond to information-based incentives.
Notes: Originally published as: Shamed and able: how firms respond to information disclosure. October 2007.

"Revised August 2008"--Publisher's web site.

Includes bibliographical references.