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
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
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