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