A Behavioral View on Firm Response to Ratings: How Positive Recognition Leads to Reductions in Charitable Contributions

130 Pages Posted: 1 Nov 2013 Last revised: 30 Jun 2019

Date Written: August 30, 2013

Abstract

While many rating systems incentivize firms to improve their performance, I investigate how positive recognition from external stakeholders can lead to reductions in performance, rather than improvements. Drawing upon behavioral and performance feedback theory, I argue that positive ratings can lead firms to decrease their subsequent performance by reducing uncertainty regarding standards of acceptable or appropriate conduct. Assuming that firms will seek to avoid uncertainty, I propose that such ratings can lead high-performing firms to redefine their aspirations and thus reduce their subsequent performance. I test this main hypothesis, as well as several moderating effects, by examining how firms responded to a rating that evaluated their prior philanthropic efforts. My findings suggest that firms recognized for their generosity were, under certain conditions, more likely to subsequently reduce their philanthropic contributions. From a practical perspective, these results highlight the unintended consequences of social ratings and provide further insight for policy makers and stakeholders interested in motivating improvements in corporate social performance.

Keywords: ratings, information disclosure, behavioral theory, corporate philanthropy, corporate social performance

JEL Classification: M14

Suggested Citation

Lewis, Ben W., A Behavioral View on Firm Response to Ratings: How Positive Recognition Leads to Reductions in Charitable Contributions (August 30, 2013). Available at SSRN: https://ssrn.com/abstract=2347862 or http://dx.doi.org/10.2139/ssrn.2347862

Ben W. Lewis (Contact Author)

Brigham Young University ( email )

565 TNRB
Provo, UT 84602
United States

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