The Price of Praise in the Market for Virtue: A Paradox of Rating and Recognizing Responsibility

64 Pages Posted: 4 Feb 2014 Last revised: 30 Jun 2019

Date Written: June 9, 2018

Abstract

In this study, I investigate how organizations respond to positive social ratings. Drawing upon theoretical insights from the organizational literatures on reputation, information disclosure, and commensuration, I argue that positive social ratings that define a specific and fixed threshold for recognition can alter the market price for a signal of virtue, and thus lead high-performing organizations to reduce their subsequent social performance. To test this hypothesis, I examine how large public corporations responded to a social responsibility rating that evaluated and recognized their prior philanthropic efforts. I find that firms recognized for their generosity were more likely to reduce their subsequent philanthropic contributions, except when they were headquartered in charitable communities and operated in socially contested industries. Theoretically, these results provide new insights into the nuances of ratings and how they influence subsequent organizational performance and encourage scholars to reconsider long-held assumptions about when and how positively rated organizations will respond. From a practical perspective, these findings highlight an unintended consequence of social ratings and provide further insight for stakeholders interested in motivating improvements in corporate social performance.

Keywords: ratings, reputation, information disclosure, commensuration, corporate philanthropy

JEL Classification: M14

Suggested Citation

Lewis, Ben W., The Price of Praise in the Market for Virtue: A Paradox of Rating and Recognizing Responsibility (June 9, 2018). Available at SSRN: https://ssrn.com/abstract=2390074 or http://dx.doi.org/10.2139/ssrn.2390074

Ben W. Lewis (Contact Author)

Brigham Young University ( email )

565 TNRB
Provo, UT 84602
United States

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