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

Abstract

This study proposes that the choice of exchange partners results from a staged process in which firms first use status to screen potential partners and then use 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 the choice of new auditors by Arthur Andersen's former clients 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 in choosing a particular auditor.

Keywords: status, reputation, networks, exchange partners, accountability