Do Reputable Companies Have Superior Earnings Quality?

Our main objective in this paper is to compare the earnings quality of reputable companies with non-reputable companies in Nigeria. We capture corporate reputation using a public measure - “The Top Listed West African Companies” by Forbes. Ten (10) Nigerian companies that made the Forbes list of top 25 West African companies in 2012 were used as the final sample size with each sampled firm having a matching firm with closet size (measured by total assets) within the same industry. Earnings quality was estimated using modified Jones (1991) model. The test for the significance of the difference in earnings quality between the two pair of firms was done using the paired sample t-test. Result of our analysis does not provide any evidence to support the claim that Nigerian companies with a higher reputation ranked by the Forbes West African top 25 companies shared a significant superior earnings quality relative to their match pairs of similar size in the same industry. The implication of our study is that much in-depth analysis of earnings quality using other proxies to complement corporate reputation should precede investment decision since the so called reputable companies do not have a significant superior earnings quality than their non reputable pairs to avert future occurrence of another Enron.