People love rankings—but how much do they really matter? According to research from the Nolan School of Hotel Administration at Cornell’s SC Johnson College of Business, the impact of rankings depends on several factors.
The researchers found that a drop in rank tends to have a more significant effect than a rise of the same size. Other factors, such as the availability of additional information, a high starting position, and the sophistication of the audience, can also influence how much a ranking matters.
“Rankings are everywhere today,” the researchers note. “Some studies suggest rankings are crucial, while others show they might not be as important as they seem.”
Changing position
To explore this, the researchers analyzed how changes in a firm’s position on the Fortune 500 list affected its stock returns. They controlled for revenue changes to isolate the impact of the rankings themselves.
“One challenge in studying rankings is that they often correlate with other factors, like performance,” they explain. “The Fortune 500 is based on revenue, so it’s hard to tell if people are reacting to the ranking or to the revenue change—or to whatever caused that change.”
The study found that a drop in ranking had a measurable impact on a firm’s stock price, while a similar rise had little to no effect.
The researchers also took advantage of a natural experiment from 1994, when the Fortune 500 expanded to include service sector firms. This change allowed more than 200 service companies, including Walmart, AT&T, and Sears Roebuck, to enter the rankings, pushing many non-service firms, mainly in manufacturing and energy, down the list. That same year, Fortune introduced the Fortune 1000, which allowed the researchers to track the decline of firms that dropped to between 501 and 1,000.
Negative response
The study showed a similar, though less pronounced, effect in this scenario, suggesting that people do respond to a drop in rankings, even when it isn’t linked to a major decline in performance or revenue.
The research also found that Fortune 500 rankings had a greater impact on organizations lower on the list or those with less alternative information, like media coverage.
Audience sophistication also plays a role in how rankings are perceived.
“Previous research often treats people as a uniform group, but different people use rankings in different ways,” the authors point out. “We tend to think people just look at the rankings, but they also read newspapers, check analyst reports, and use that information alongside rankings.”
The key takeaway is that a drop in rankings is generally more impactful than a rise.
“This may be due to what we call ‘reputation anxiety,'” the researchers suggest. “The fear of falling can drive firms to take action to avoid a bigger drop in the future.”
