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Reputation Effects In The Market Of Certifiers: Evidence From The Audit Industry

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  • ÁRON TÓTH

Abstract

type="main" xml:lang="en"> 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. (JEL L15, L8, M4)

Suggested Citation

  • Áron Tóth, 2014. "Reputation Effects In The Market Of Certifiers: Evidence From The Audit Industry," Economic Inquiry, Western Economic Association International, vol. 52(2), pages 505-517, April.
    • Handle: RePEc:bla:ecinqu:v:52:y:2014:i:2:p:505-517
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    Cited by:

    1. Stefan Renckens & Graeme Auld, 2022. "Time to certify: Explaining varying efficiency of private regulatory audits," Regulation & Governance, John Wiley & Sons, vol. 16(2), pages 500-518, April.

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    More about this item

    JEL classification:

    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L8 - Industrial Organization - - Industry Studies: Services
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting

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