Does Company Reputation Matter for Financial Reporting Quality? Evidence from Restatements

Abstract:     
In this study, we explore the association between company reputation and the likelihood of a financial statement restatement. We focus on restatements because they are one of the most visible forms of impaired financial reporting quality, and we suggest that company reputation concerns will influence the reporting processes to reduce the potential reputational damage associated with financial statement restatements. We proxy for company reputation using measures based on Fortune’s America’s Most Admired Companies List. For a sample of 3,795 observations from 2000 through 2005, we find that high-reputation companies are less likely to restate both annual and quarterly financial statements after controlling for audit fees (a proxy for audit effort), corporate governance, and the potential effects of CEO reputation. In addition, high-reputation companies have a significantly lower likelihood of being involved in more serious restatements (i.e., misapplications of GAAP or fraud-related restatements). We also find that high-reputation companies pay higher audit fees after controlling for corporate governance. These results are consistent with company reputation having an important effect on financial reporting quality and with the effect of reputation being distinct from that of corporate governance.

Keywords: corporate reputation, financial reporting quality, restatements, audit fees

JEL Classifications: G34, D80, M41, M43, M49

Working Paper Series