Value of certification in collective reputation crises: Evidence from Chinese dairy firms

Collective reputation crisis incidents imply considerable negative within-sector spillovers. Understanding how to reduce such negative spillovers is crucial for industry development, especially in the food industry where information is asymmetric. As certification is an important tool to reduce information asymmetry in product quality, it’s role in reducing such spillovers needs to be discussed systematically. First, we use an analytical model to reveal the effects and mechanisms by which certification helps dairy firms resist the negative spillovers of collective reputation crises. Next, we study the effects of certification in the context of a large-scale dairy scandal in China. Using firm-level microdata, we empirically analyze the effects of adopting certification on improving innocent firms’ return on capital. The results show that in the year of the scandal, the return on capital of firms without certification was significantly negatively affected while that of firms with certification was not affected. In the wake of the scandal, adopting certification helped dairy firms effectively improve their return on capital, but these effects diminished over time. In addition, the effects are larger for firms with lower established reputations, such as new and non-state-owned dairy firms.