“The End of Reputation”

[T]he business model of firms on Wall Street, including accounting firms, investment banks and accounting agencies, no longer takes into account or values investment in reputation….[the economic theory of reputation] posits that profit-maximizing agents will invest in their reputation up to the point at which the cost of doing so is equal to the expected benefit. It’s rational, in other words, to care about what others think of you.

…There are a lot of firms, such as accounting firms that do audits, credit rating agencies, and investment banks that do underwriting, whose very existence traditionally has been explained by the fact that they’re reputational intermediaries. Companies in search of capital will guarantee that they’ll be audited by a major accounting firm; or be rated by one of the best agencies, like Moody’s or Standard and Poors; or to have underwriting by a bulge bracket investment firm like Goldman Sachs; and to be listed on the New York Stock Exchange or the Nasdaq. People look at those “Good Housekeeping” seals of approval and think they can trust the main street company coming into the capital market. That business model had a lot of explanatory power even just twenty years ago. But it seems almost farcical today….

via American Interest Magazine.

Worth reading the whole thing.