bus 374 dr. rajiv krishnan kozhikode. reputation: quality expectations based on accumulated...
TRANSCRIPT
How are organizations evaluated?
BUS 374Dr. 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