Legality rating (LR) is an under-investigated topic, due to its recent introduction. Moreover, it is difficult to interpret univocally the LR and to frame it within a well-defined theoretical framework. However, since a few years, data are available to be empirically analysed. To explain the reasons leading to the choice of companies’ LR quality, we aim to investigate the determinants of LR through an econometric analysis that includes governance and economic variables. The requirements that allow to obtain a high LR must only be verified and not evaluated, so that firms that require the LR already know their future score. However, our hypothesis is that companies require LR to signal their good behaviour to reach or maintain their legitimacy or to divert attention from an unsatisfactory economic and financial situation. To address this issue, we use a unique sample of 1,104 Italian private firms that obtained a LR in 2016. Focusing on governance variables, we find that board size, ownership concentration and family-owned companies and cooperatives are positively related to quality of LR. As to economic variables, Roa is negatively related to quality of LR. These results show that where the governance features make the firms more inclined to look after its reputation the LR is higher. The LR, rather than encouraging the respect for the principles of legality, principally makes to emerge companies that already behave in a virtuous manner, i.e. firms tend to report a behaviour they already hold rather than modify it according to the objective of obtaining the LR.

What Is Behind the Choice of the Quality of Legality Rating by Italian Private Firms?

La Rosa, Fabio
Methodology
;
2019

Abstract

Legality rating (LR) is an under-investigated topic, due to its recent introduction. Moreover, it is difficult to interpret univocally the LR and to frame it within a well-defined theoretical framework. However, since a few years, data are available to be empirically analysed. To explain the reasons leading to the choice of companies’ LR quality, we aim to investigate the determinants of LR through an econometric analysis that includes governance and economic variables. The requirements that allow to obtain a high LR must only be verified and not evaluated, so that firms that require the LR already know their future score. However, our hypothesis is that companies require LR to signal their good behaviour to reach or maintain their legitimacy or to divert attention from an unsatisfactory economic and financial situation. To address this issue, we use a unique sample of 1,104 Italian private firms that obtained a LR in 2016. Focusing on governance variables, we find that board size, ownership concentration and family-owned companies and cooperatives are positively related to quality of LR. As to economic variables, Roa is negatively related to quality of LR. These results show that where the governance features make the firms more inclined to look after its reputation the LR is higher. The LR, rather than encouraging the respect for the principles of legality, principally makes to emerge companies that already behave in a virtuous manner, i.e. firms tend to report a behaviour they already hold rather than modify it according to the objective of obtaining the LR.
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11387/138305
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