BUS 374 Dr. Rajiv Krishnan Kozhikode

  Reputation: Quality expectations based on accumulated evidence of past demonstration of quality  Status: Quality expectations based on network of affiliations in an exchange network A tale of two assets

  Reputation for quality and Status are related but not the same.  Both reputation and status matter in audience evaluation  They tend to be correlated, albeit imperfectly  But it is often easier to observe status signals than it is to verify reputation for quality  Even if reputation for quality is verifiable, audience have limited attention to scan every offering. Benjamin & Podolny’s view

  Audience allocate their limited attention to high status organizations  Hence, return to reputation for quality tend to be higher for high status actors  Quality improvements of low status actors go largely unnoticed Audience’s attention to reputation for quality

  Producing at higher quality is difficult  But as return to quality is higher for high status organizations, they tend to invest more in quality  Low status organizations don’t see value in improving their quality, so they do not aim to improve quality  Thus, high status actors will also choose to produce at a higher level of quality – i.e., enhance their reputation for quality Return to quality and investment in quality

  High status organizations do not aim to maintain high status affiliates  Even if low status organization gains a new high status affiliate, audience ignore it as an anomaly.  But if a high status organization gains a new high status organization, audience tend to see value in it.  So return to gaining high status affiliations is also high for higher status organizations What is the difficulty in simply getting high status affiliations?

  Reputation for quality  Quality of wines are evaluated by wine critiques.  Blind tasting (i.e., no knowledge of where the wine comes from and who produces it) makes these evaluations unbiased.  Rigorous methods are employed to judge a wine’s quality.  Status  Some appellations are more prestigious than others  Listing of an appellation on a wine bottle implies deference to that appellation A study of California Wineries

  Wines with high ratings fetch high price  Wines carrying labels of prestigious appellations fetch high price  Wines with high ratings fetch a higher price when they carry the label of a prestigious appellation  Wines that carry the label of prestigious appellation fetch a higher price when the winery already has affiliations with other high status appellations  High status wineries with high quality wines tend to both acquire high quality grapes and produce high quality wines in the future. The results

  Audience have limited attention  They first screen potential associates based on status considerations  This will be more so when they are monitored by external audience  They then evaluate the screened potential associates based on their reputation for quality and reputation for integrity  i.e., there is a staged process of screening (status based) and selection (reputation based) Jensen & Roy’s view

  After the fall of Arthur Andersen, US firms had to choose new accountants in short notice  Will they choose from another Big 5 (i.e., remaining Big 4) or any auditor?  And if they choose among the Big 4, whom will they finally pick A study of auditor selection

  They chose from a Big 4 as opposed to any auditors  When they were under scrutiny from institutional investors  When they were listed in a prominent stock exchange (NYSE or NASDAQ)  They chose a Big 4  if they had sufficient industry experience  But not too much experience (i.e., overlap with competitors)  When they had high reputation for integrity The results

  Next week  End term exam  NOT multiple choice  SHORT ANSWER type questions  OPEN BOOK format That’s all for today