Does reputation work? Evidence from investors' perception on earnings

This study investigates the effect of CEO reputation, as proxied by high-profile awards to CEOs, on investors' predictability of earnings. Existing literature has documented that the actions of business stakeholders are affected by reputation concerns. We provide two competing theories of the CEO reputation effect on financial reporting quality: the alignment effect and the entrenchment effect. Using the approach of earnings-return association, we find evidence that, after superstar CEOs receive the high profile award, current stock returns incorporate future earnings information much more weakly than prior to the award. The results suggest that, consistent with the entrenchment effect, the reputation induces CEOs to produce lower quality financial reporting in order to avoid any repercussions from missing capital market expectations.