CEO Reputation and Earnings Quality

Francis, Jennifer; Huang, Allen; Rajgopal, Shivaram; Zang, Amy

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CEO Reputation and Earnings Quality

42 Pages Posted: 1 Dec 2004

See all articles by Jennifer Francis

Allen Huang

Hong Kong University of Science and Technology - Department of Accounting

Amy Zang

Hong Kong University of Science and Technology - Department of Accounting

There are 2 versions of this paper

Date Written: October 2004

Abstract

We examine the association between CEO reputation (proxied by the extent of press coverage) and the quality of the firm's earnings (proxied by two accruals-based measures). We test three explanations for an association between these constructs: the efficient contracting hypothesis suggests that reputed CEOs are associated with good earnings quality, while the rent extraction and matching explanations argue that reputed CEOs are associated with poor earnings quality. Using a simultaneous equations system to capture the endogeneity of the constructs, we find (consistent with the rent extraction and matching arguments) that more reputed CEOs are associated with poorer earnings quality than are less-reputed CEOs. Further tests find little support for the rent extraction hypothesis. We conclude that the reason more reputed CEOs are associated with poor earnings quality firms is that such firms require more talented managers and, therefore, employ more reputed CEOs.

JEL Classification: M41, M43, M49, G34

Suggested Citation: Suggested Citation

Francis, Jennifer and Huang, Allen and Rajgopal, Shivaram and Zang, Amy, CEO Reputation and Earnings Quality (October 2004). Available at SSRN: https://ssrn.com/abstract=609401