Corporate Reputation And Earnings Quality

Abstract

Investor confidence and the quality of reported information are primary issues in our current financial reporting environment as a result of recent scandals and financial crises. Assessing the quality of reported financial information is an important issue for investors. Can investors use corporate reputation to assess earnings quality? This paper examines the association between corporate reputation and earnings quality. We use a public measure – “America’s Most Admired Companies” – as a proxy for corporate reputation. These firms are considered to possess superior reputation. A cross-sectional accruals-based measure proxies for earnings quality. We compare the firms listed on America’s Most Admired Companies of 2006 to a sample of control firms and find that sample firms have higher earnings quality than control firms. Our results should be of interest to managers who engage in behavior leading to or maintaining a positive corporate reputation, and to financial analysts who conduct research on the impact of corporate reputation on earnings quality. Moreover, our study can increase individual investors’ confidence in assessing the earnings quality of companies with a superior reputation.