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  • September 2010
  • Article
  • Strategic Management Journal

How Firms Respond to Being Rated

By: Aaron K. Chatterji and Michael W. Toffel
  • Format:Print
  • | Pages:29
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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

System; Information; Decisions; Cost; Opportunities; Performance; Business and Stakeholder Relations; Economics; Theory; System Shocks; Rank and Position

Citation

Chatterji, Aaron K., and Michael W. Toffel. "How Firms Respond to Being Rated." Strategic Management Journal 31, no. 9 (September 2010): 917–945. (Lead article.)
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About The Author

Michael W. Toffel

Technology and Operations Management
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Related Work

    • 12 Oct 2012
    • Faculty Research

    Environmental Disclosures: Lessons Learned from Empirical Research

    By: Michael W. Toffel
Related Work
  • Environmental Disclosures: Lessons Learned from Empirical Research By: Michael W. Toffel
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