ETHICAL REPUTATIONS AND EARNINGS QUALITY: RECENT EVIDENCE FROM THE ‘100 BEST’ CORPORATE CITIZENS

Abstract

This study investigates whether firms regarded as being ethical are less likely to engage in misleading financial reporting. Our study includes a sample of firms identified by CRO magazine as “Best Corporate Citizens” in the U.S. between 2000 and 2008. We find that these firms, when compared to an industry- and size- matched sample, report significantly lower levels of discretionary accounting accruals. Further analysis reveals that these results are driven by lower amounts of positive (income-increasing) discretionary accruals in the CRO firms as compared to the matched sample. Our results are consistent with the hypothesis that firms identified as being ethical are less likely to make misleading accounting decisions, but inconsistent with some literature suggesting that ethical rankings are poor indicators of ethical behavior.