How are organizations evaluated?

1. How are organizations evaluated? BUS 374 Dr. Rajiv Krishnan Kozhikode

2. A tale of two assets • Reputation: Quality expectations based on accumulated evidence of past demonstration of quality • Status: Quality expectations based on network of affiliations in an exchange network

3. Benjamin & Podolny’s view • 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.

4. Audience’s attention to reputation for quality • 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

5. Return to quality and investment in 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

6. What is the difficulty in simply getting high status affiliations? • 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

7. A study of California Wineries • 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

8. The results • 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.

9. Jensen & Roy’s view • 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)

10. A study of auditor selection • 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

11. The results • 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

12. That’s all for today • Next week • End term exam • NOT multiple choice • SHORT ANSWER type questions • OPEN BOOK format