Do corporate reputation concerns constrain real earnings management practices? A multidimensional analysis

Abstract

Purpose: This study integrates Eisenegger and Imhof's (EI) reputation theory and the reputation-building hypothesis to explore how corporate reputation (CREP) concerns constrain real earnings management (REM). Motivation of the study: This study empirically tests the combined and individual effects of the dimensions of Eisenegger and Imhof's corporate reputation theory on real earnings management practices. Design/methodology/approach: The study used the least-square dummy variable (LSDV) two-way fixed effects estimator on a panel data constructed from 203 non-financial firms listed in 12 sub-Saharan African stock exchanges from 2014 to 2020. Main findings: The study provides empirical evidence that CREP, consistent with Eisenegger and Imhof’s reputation theory, curtails REM practices. Functional, social, and expressive reputation concerns reduce the managerial tendency to manipulate real activities, while considering other REM influencing factors. This result is consistent across REM components, country-level analysis, and endogeneity tests. Practical implications/Managerial impact: The results of this study are anticipated to motivate the use of corporate reputation building as a preventive strategy against REM, as it deters managers from manipulating business operations. The findings provide managers with a valuable approach to evaluating a firm's various reputations and how they can be leveraged to curb REM. Novelty/Contribution: The study offers new perspectives on assessing firm reputation from various stakeholder viewpoints and how CREP serves as a complement to existing CG mechanisms to mitigate managerial opportunism.