A Theory of Certification with an Application to the Market for Auditing Services
AbstractThe paper develops a theory which attempts to understand segmentation and fee-setting in certification markets. The basis for the theory is that certifiers offer differentiated tests; for a given object it may be more difficult to pass the test of certifier i than the test of certifier j. Given the test standards, certifiers compete for customers via their fee-setting. In equilibrium, sellers with low unobservable quality self-select to a lenient test and sellers with high unobservable quality self-select to a stricter test. Moreover, sellers selecting an easy test pay a lower (endogenous) certification fee than sellers selecting a difficult test. As a test of the theory, I analyze Norwegian panel data to investigate whether firms affilated with a cheaper or a non-Big 5 auditor have worse (unobservable) characteristics, measured by subsequent drops in sales, assets or equity. The empirical analysis supports the theory.
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Bibliographic InfoPaper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2004/10.
Length: 39 pages
Date of creation: 26 Aug 2004
Date of revision:
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Postal: NHH, Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway
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Fax: +47 55 95 96 50
Web page: http://www.nhh.no/en/research-faculty/department-of-business-and-management-science.aspx
More information through EDIRC
Adverse Selection; Auditing; Investment Banking; Oligopoly theory; Signaling;
Find related papers by JEL classification:
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
- M42 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Auditing
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- Marco Ottaviani & Peter Sorensen, 1999.
Game Theory and Information
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- Yiquan Gu, 2008. "Imperfect Certification," Ruhr Economic Papers 0078, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
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