How Firms Respond To Being Rated

Date Added: Jun 2009
Format: PDF

While many rating systems seek to help buyers overcome information asymmetries when making purchasing decisions, they investigate how these ratings also influence the companies being rated. The authors examine how several hundred firms respond to corporate environmental ratings issued by a prominent independent social rating agency, and take advantage of an exogenous shock that occurred when the agency expanded the scope of its ratings. The paper is among the first to theorize about the impact of ratings on subsequent performance, and they introduce important contingencies that influence firm response. These theoretical advances inform stakeholder theory, institutional theory, and economic theory.