Selling Reputation When Going out of Business

44 Pages Posted: 20 Jul 2004  

Hendrik Hakenes

Finance Group; Centre for Economic Policy Research (CEPR)

Martin Peitz

University of Mannheim - Department of Economics

Date Written: June 2004

Abstract

Is the reputation of a firm tradeable when the previous owner has to retire even though ownership change is observable? We consider a competitive market in which a share of owners must retire in each period. New owners, observing only recent profits, bid for the firms on sale. Customers are concerned with the owners' type, which reflects the quality of the good or service provided. When a customer observes an ownership change, he may have an incentive to switch to a different firm even if his past experience was good. However, we show that, in equilibrium, customers believe that also the new owner is of the good type. Hence reputation is tradeable, although ownership change is observable. In our model, reputation is an intangible asset, embodied in an attractive customer base. Firms owned by a good type sell at a premium.

Keywords: reputation, ownership change, intangible asset, theory of the firm

JEL Classification: D40, D82, L14, L15

Suggested Citation

Hakenes, Hendrik and Peitz, Martin, Selling Reputation When Going out of Business (June 2004). CESifo Working Papers No. 1213. Available at SSRN: https://ssrn.com/abstract=558130

Hendrik Hakenes (Contact Author)

Finance Group ( email )

Adenauerallee 24-42
D-53113 Bonn
Germany
+49-228-73-9225 (Phone)

HOME PAGE: http://www.finance.uni-bonn.de/hakenes

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Martin Peitz

University of Mannheim - Department of Economics ( email )

D-68131 Mannheim
Germany
+49 621 181-1835 (Phone)

HOME PAGE: http://peitz.vwl.uni-mannheim.de/

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