Ratings Move Companies as Well As Consumers

A recent paper–“How Firms Respond to Being Rated”–by Duke faculty Aaron Chatterji and Harvard’s Michael Toffel provides insights into how ratings affect corporate performance.

Ratings by companies like Moody’s, Michelin, and Consumer Reports have long swayed the behavior of consumers and investors. Ratings also influence the performance of the companies they describe.

Corporate environmental ratings meant to guide individuals and fund managers on investing also influenced the rated firms, according to the researchers, who examined environmental performance using corporate-wide toxic pollution, a commonly used outcome metric.  Using environmental ratings from KLD Research and Analytics, Inc. (KLD), which are widely used in social investing circles, they examined how hundreds of organizations responded to being involuntarily included then the agency expanded the number of firms it rated.

Findings:

  • Firms with poor KLD ratings improved their  performance more than other firms
  • The difference was driven by firms in highly regulated industries and by firms with more low-cost opportunities to exploit.

Chatterji and Toffel’s study has policy implications for boosting the effectiveness of government information disclosure programs, according to the researchers.  The study is among the first to theorize about the impact of ratings on firms’ subsequent performance.

 

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