Tricia Bromley, University of Utah

Direct and Diffuse Impacts of Ratings Systems: Peer Effects and the Organizational Response to Environmental Ratings
Tricia Bromley, Political Science, University of Utah

Description

Semester: 
Fall 2013
Lecture Time: 
Friday, October 25, 2013 - 1:30pm to 3:00pm
Lecture Location: 

Room K1310, Ross School of Business

Abstract

Using data on pollution emissions and environmental ratings from a sample of 896 public firms over the period 2000 to 2004, this article theorizes that ratings systems can have indirect effects on firm behavior. The presence of third-party evaluation systems, such as ratings, rankings and certifications, can lead to changes in organizational policies, practices and outcomes. Most studies reduce these effects to direct influences on the rated organizations, emphasizing that organizations respond to being rated so in response to internal professional dynamics or so that they can maintain the support of key external stakeholders, such as consumers and investors. In contrast, we argue that rating systems also generate indirect and diffuse effects that flow through the influence of rated peers. As a ratings system becomes more institutionalized, covering more firms, it takes on greater significance to both rated and unrated firms, amplifying their response. We test this proposition by analyzing how pollution emissions change in response to variation in the proportion of firms rated in two key peer groups – product-market and geographic peers. In support of our argument, we find that a focal firm tends to reduce its emissions more when more firms are rated. The findings are particularly robust when the focal firm itself is rated, although unrated firms also reduce their emissions as the proportion of their geographic peers that are rated increases. Our findings indicate that the effects of external performance measures cannot be reduced to their direct influence on the individual organizations subject to formal evaluation.

Recording & Additional Notes