Staging Exchange Partner Choices: When Do Status and Reputation Matter?

Abstract

This study models the choice of exchange partners as a staged process in which a firm first uses status to screen potential partners and then uses reputation to choose a specific firm within the chosen status bracket. We examine our model in the context of the U.S. audit industry and choices of new auditors by former clients of Arthur Andersen following its collapse in 2002. We show that accountability to powerful market institutions is an important determinant of the choice of status bracket, whereas reputations for industry expertise and business integrity are important to the choice of a particular auditor.