Reputation effects in the market of certifiers: Evidence from the audit industry

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Abstract

Certifiers verify unobserved product characteristics for buyers and thereby alleviate informational asymmetries and facilitate trade. When sellers pay for the certification, however, certifiers can be tempted to bias their opinion to favor sellers. Indeed, accounting scandals and inflated credit ratings suggest sellers may prefer to select dishonest certifiers. I test this proposition by estimating the effect of adverse quality signals on audit demand. Exploiting the natural experiment of Arthur Andersen's demise, I find that auditors with worse quality signals experience a fall in demand. This suggests that reputation effects are at work even in the presence of conflicts of interest.
Original languageEnglish
Pages (from-to)505-517
Number of pages13
JournalEconomic Inquiry
Volume52
Issue number2
Early online date25 Feb 2014
DOIs
Publication statusPublished - 1 Apr 2014

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