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 (i.e., a revealed misstatement). Reputation can bring real economic benefits to companies and once impaired, it is costly to re-build. Because of this, companies with strong reputations have incentives to provide higher quality financial statements. 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 process and reduce financial statement misstatements (and ultimately restatements). We proxy for company reputation using measures based on Fortune’s America’s Most Admired Companies List. For a sample of 8,081 observations from 1995 through 2009, we find that companies with higher reputation scores are less likely to misstate their financial statements after controlling for CEO tenure, corporate governance, and audit fees (a proxy for audit effort). In addition, we find that companies with higher reputations have better accruals quality. We also find that company reputation is positively associated with audit fees even 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: Company Reputation, Financial Reporting Quality, Restatements, Audit Fees

JEL Classification: M4, M41, M42