Accounting for Negative Attention: Status and Costs in the Market for Audit Services

Abstract

Prior work has emphasized the role of positive attention spillovers in driving cost advantages for high-status firms, with exchange partners offering preferential terms to high-status organizations because they anticipate benefits. Yet, spillovers from a client to a supplier may also be negative. These negative spillovers can be exacerbated when high-status actors are involved, because of the high level of publicity they attract. In this paper, we propose that suppliers’ concerns about negative attention are an important contingent factor determining whether high-status firms enjoy cost advantages or, instead, pay a premium. We expect that when suppliers anticipate that negative spillovers are more likely than positive ones and when they enjoy some bargaining power over their clients, a positive relationship between status and costs will result. To test this argument, we analyze fees paid by clients of varying status levels in the U.S. market for audit services. Consistent with our theory, we find that (1) high-status clients are charged more than their lower status peers and (2) the media attention clients receive does mediate this relationship. Indicative of the role of the supplier’s expectation of negative spillovers and their bargaining power, we also demonstrate that the positive relationship becomes stronger when auditors view clients as presenting a greater risk of future negative events and when clients have more bargaining power. Our efforts at theoretical integration result in a fuller picture of the role of status in shaping a firm’s costs, suggesting that status involves advantages in some settings but disadvantages in others. Supplemental Material: The online appendix is available at https://doi.org/10.1287/orsc.2021.15814 .

ESG rating divergence and corporate green innovation

“…Our study echoes the literature on the information mechanism of media attention (Guest, 2021;Jiang et al, 2022;Ody-Brasier & Sharkey, 2023). As an information intermediary, the media can directly and indirectly disseminate information about ESG rating divergence.…”

The Status of Status Research: A Review of the Types, Functions, Levels, and Audiences

“…• Motivate low-status actors' redirection to domains not attended by high-status actors (e.g., Reschke, Azoulay, & Stuart, 2018) • Prompt associates of high-status actors to adopt precautionary measures to hedge against negative spillover (e.g., Ody-Brasier & Sharkey, 2023) iii. Magnet:…”

“…Research has also shown that associates of high-status actors often engage in preempting behavior when they fear that they might be indirectly held accountable for these actors’ transgressions. Ody-Brasier and Sharkey (2023) observe that high-status firms, when faced with allegations or proven instances of misconduct, not only draw scrutiny to themselves but also place their service providers into the spotlight, potentially undermining the latter’s status. As a precautionary measure to hedge against this risk, these service providers, particularly accounting firms entrusted to certify balance sheets, levy higher fees on high-status firms.…”