The Impact of Corporate Reputation on Earnings Management Decisions

Abstract

This thesis consists of empirical tests and theoretical works exploring how the corporate reputation influences manager’s earnings management decisions. Building and protecting corporate reputation is one of the challenges to CEOs today. Some researchers suggest that corporate reputation is one important factor when investors evaluate a firm. The other scholars indicate that corporate reputation has an impact on manager’s information disclosure and strategies making. Earnings management occurs when managers bias financial reporting or construct transactions strategically to impact the cash flow. I am curious whether the corporate reputation has an effect in earnings management behaviour to mislead investors. Firstly, I test how the corporate reputation affects manager’s earnings management behaviour in both accruals manipulation and real manipulations. I find that firms with worse reputation use more increasing discretionary accruals and intend to manipulate sales. Then, I study the reputation effect on discretionary accruals in a repeated cheap-talk game. I find that for managers in firms without prior good reputation among investors, smoothing earnings is an effective way to alter the investors’ opinion.