Shamed and Able: How Firms Respond to Information Disclosure.

Abstract

We examine how firms respond to third-party ratings of their corporate environmental activities. Using insights from institutional theory, we hypothesize that ratings are particularly likely to spur responses from firms whose legitimacy is threatened and thus are shamed by these ratings. We extend existing theory by drawing on the strategic choice perspective to hypothesize that the greatest performance improvements will be exhibited by those shamed firms that face lower-cost opportunities to improve and thus are particularly able to respond. We tike advantage of a natural experiment, when a major social rating agency expanded the scope of its ratings, to empirically test these hypotheses in the context of environmental ratings and environmental performance of more than 650 firms in the United States. We find empirical evidence that supports our hypotheses, and present implications for theory and public policy.