The effect of corporate reputation on accounting conservatism

Abstract

This study examines the impact of corporate reputation on accounting conservatism. We argue that firms with valuable reputations are likely to select conservative accounting practices as a form of insurance to protect their reputations. We document strong evidence that companies with high reputations—those included on Fortune's “Most Admired Companies” list—employ more conservative accounting than firms not on the list. We also investigate a hand-collected sample of firms with product recalls. Accounting conservatism appears to offset the negative stock price effect of product recalls, and high-reputation firms appear to benefit substantially more from conservative accounting than control firms.