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Industry Reputation Crisis and Firm Certification: A Co-evolution Perspective

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Abstract

Industry reputation crises trigger producers and consumers to switch to certification as a signal of quality, especially in a weak institutional environment. In this paper, we posit that firm certification as a signaling mechanism involves the co-evolution of firms and consumers. We investigate the impact of industry reputation crises on firm certification as a response strategy. Feedback between producers and consumers causes producers to seek more certifications over time to differentiate themselves from competitors. However, the proliferation of certifications may dilute their credibility and reduce the effectiveness of the signal. Competition from imports that command higher trust from consumers exacerbates the problem in developing countries. We conduct empirical tests using firms in China’s dairy industry after an industry reputation crisis. The findings support our hypotheses. This study provides insights on the certification mechanisms through which producers and consumers interact and the effect of institutional environments on this interaction. It also offers implications for managers on how to better respond to industry crises and for policymakers on how to manage the certification market.

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Data availability

The datasets of certifications that support the findings of this study are available from the Certification and Accreditation Administration of China at http://cx.cnca.cn/CertECloud/result/skipResultList. But restrictions apply to the availability of these data. The data are, however, available from the authors upon reasonable request and with the permission of the Data Security Law of China.

The firm-level and Customs import and export datasets that support the findings of this study are the product of annual surveys conducted by the Chinese National Bureau of Statistics and are not available due to data privacy laws. The annual statistical data are available at https://data.stats.gov.cn/easyquery.htm?cn=C01.

Notes

  1. Source: “Sanlu Baby Formula Contamination Incident,” Baidu Baike, https://baike.baidu.com/.

  2. Source: China’s national certification and accreditation information public service platform, http://cx.cnca.cn/CertECloud/result/skipResultList.

  3. We further cleaned the data in the following ways. We deleted firms manually if they only applied for certifications unrelated to the two industries and their names and main products do not include words such as “milk,” “dairy,” “drink,” “baby/child,” “food,” “biscuit,” or “bakery.” We deleted firms established after 2008. We deleted firms with an average annual employment below eight persons, observations with important missing variables, and firms that fall out of the official “above-scale” threshold standard, that is, those privately-owned firms with sales below 5 million yuan ($700, 000) by 2010 and sales below 20 million yuan ($3 million). Since this study is on the change of the firms’ voluntary certification behavior, we deleted compulsory certifications and other certifications unrelated to either industry.

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Acknowledgements

This research is supported by the National Social Science Fund of China (19BJY105).

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Authors and Affiliations

  1. School of Economics and Management, Dalian University of Technology, Dalian, China

    Yanying Chen

  2. School of Law, Hangzhou City University, Hangzhou, China

    Liang Ping

  3. Western Kentucky University, Bowling Green, KY, USA

    Feng Helen Liang

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Appendix

Appendix

See Tables 8 and 9.

Table 8 Testing results of parallel trend assumption
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Table 9 Robustness check: firm quality measured by R&D dummy and media exposure
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Chen, Y., Ping, L. & Liang, F.H. Industry Reputation Crisis and Firm Certification: A Co-evolution Perspective. J Bus Ethics 186, 761–780 (2023). https://doi.org/10.1007/s10551-023-05438-5

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