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

Research output: Contribution to journalArticle

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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.
LanguageEnglish
Pages505-517 (2014 Best Article Award)
JournalEconomic Inquiry
Volume52
Issue number2
DOIs
StatusPublished - Apr 2014

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Seller
Industry
Audit
Reputation effect
Quality signal
Arthur Andersen
Conflict of interest
Credit rating
Buyers
Scandal
Natural experiment
Certification
Auditors
Product characteristics
Informational asymmetry

Cite this

Reputation effects in the market of certifiers : Evidence from the audit industry. / Tóth, Áron.

In: Economic Inquiry, Vol. 52, No. 2, 04.2014, p. 505-517 (2014 Best Article Award).

Research output: Contribution to journalArticle

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