The Challenge of “Doing Business with Strangers”: Audit Reports as a “Signaling Instrument

Abstract

This paper discusses how firms in Turkey have used audit reports of companies like Deloitte as a "costly signaling" instrument. The paper shows that the firms integrating into the global economy during 1990s were in intense competition to find global business partners. The need to do "business with strangers" created a new challenge for this firms: Broadcasting strong signals proving the capacity of being a reliable, long-standing business partner. When the partnerships were formed in smaller business circles, these signals were produced by face-to-face social interactions. But when the entrepreneurs cooperate/negotiate with firms from different national and cultural backgrounds, audit reports from prestigious companies became a universal signal about the firms' reliability. To illustrate the transformation in this "signaling" process, we conduct in-depth interviews with the managers of auditing firms, entrepreneurs and did an archival study on many resources of the period.