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How firms respond to being rated
Author(s) -
Chatterji Aaron K.,
Toffel Michael W.
Publication year - 2010
Publication title -
strategic management journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 11.035
H-Index - 286
eISSN - 1097-0266
pISSN - 0143-2095
DOI - 10.1002/smj.840
Subject(s) - agency (philosophy) , principal–agent problem , purchasing , scope (computer science) , context (archaeology) , stakeholder , stakeholder theory , corporate social responsibility , business , agency cost , marketing , information asymmetry , test (biology) , economics , industrial organization , microeconomics , public relations , corporate governance , finance , management , sociology , paleontology , computer science , political science , biology , programming language , shareholder , social science
While many rating systems seek to help buyers overcome information asymmetries when making purchasing decisions, we investigate how these ratings also influence the companies being rated. We hypothesize that ratings are particularly likely to spur responses from firms that receive poor ratings, and especially those that face lower‐cost opportunities to improve or that anticipate greater benefits from doing do. We test our hypotheses in the context of corporate environmental ratings that guide investors to select ‘socially responsible,’ and avoid ‘socially irresponsible,’ companies. We examine how several hundred firms responded 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. Our study is among the first to theorize about the impact of ratings on subsequent performance, and we introduce important contingencies that influence firm response. These theoretical advances inform stakeholder theory, institutional theory, and economic theory. Copyright © 2010 John Wiley & Sons, Ltd.