How Firms Respond to Being Rated

57 Pages Posted: 3 Oct 2007 Last revised: 29 Jul 2011

See all articles by Aaron Chatterji

Aaron Chatterji

Duke University - Fuqua School of Business

Michael W. Toffel

Harvard Business School

Date Written: June 21, 2009

Abstract

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 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. 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.

Keywords: information disclosure, environmental performance, corporate social responsibility, industry self-regulation, ratings

Suggested Citation

Chatterji, Aaron and Toffel, Michael W., How Firms Respond to Being Rated (June 21, 2009). HBS Technology & Operations Mgt. Unit Research Paper No. 08-025. Available at SSRN: https://ssrn.com/abstract=1018719 or http://dx.doi.org/10.2139/ssrn.1018719

Aaron Chatterji (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

Michael W. Toffel

Harvard Business School ( email )

Boston, MA 02163
United States
617.384.8043 (Phone)

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