臺大管理論叢 NTU Management Review VOL.28 NO.3

Does CEO Reputation Matter to Financial Reporting Quality 2 1. Introduction Firms are competing in the capital market to acquire resources. The quality of financial reporting is important to capital providers and other stakeholders because they rely on a firm’s earnings information to make crucial decisions (IASB, 2008). Finance scholars argue that managerial characteristics may form corporate policies, including financial reporting decisions (Ali and Zhang, 2015; Francis, Huang, Rajgopal, and Zang, 2008; Graham, Harvey, and Rajgopal, 2005; Malmendier and Tate, 2009). It is therefore urgent to extend this line of research in accounting to study the effects of managerial traits on firm financial reporting quality. Reputation research indicates that reputation concerns affect the behavior of business professionals (Fich and Shivdasani, 2007; Larcker and Richardson, 2004). A CEO occupies the highest position in a firm and is the human face of the organization. A firm’s reputation is mostly based on the image of its CEO, and thus the CEO’s reputation is one of the most important and intangible assets of a firm (Gaines-Ross, 2003). The CEO reputation effect on firms’ reporting decisions is crucial since high-quality financial reporting is greatly appreciated by market participants (Watts and Zimmerman, 1986). The generally accepted accounting principles grant great latitude for managers to exercise judgment in financial reporting. Two arguments in positive accounting research (Watts and Zimmerman, 1978) categorize managerial incentives related to exercising accounting discretion as either efficient or opportunistic motivation. The former argues that managers exercise accounting discretion in an efficient manner to protect shareholder value in the long run. The latter posits that self-opportunistic managers systematically exploit accounting discretion to increase their own wealth at the expense of shareholders. Although limited in quantity, several studies have explored the relationship between CEO reputation and a firm’s reporting credibility, but the results have been mixed. Some have predicted positive externalities from CEO reputation, supporting the efficient contract hypothesis. For instance, Ali and Zhang (2015) investigated how CEO tenure affects firm reporting quality. They asserted that CEOs build up their reputation as their durations extend, and thus earnings are of higher quality. Jian and Lee (2011) investigated how markets react to capital investment announcements. They demonstrated that stock markets respond more favorably on capital investment announced by reputable CEOs due to their reporting credibility. Hence, CEO reputation converts into the unseen wealth of a company. However, there are studies that have claimed that highly reputed CEOs engage in earnings management behavior for their self-interests, supporting the managerial