The 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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Paper provided by Department of Finance and Management Science, Norwegian School of Economics and Business Administration in its series Discussion Papers with number
2004/10.
Length: 39 pages Date of creation: 26 Aug 2004 Date of revision: Handle: RePEc:hhs:nhhfms:2004_010
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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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Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)
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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