Reputation to the vicious circle of earnings quality and financial performance

Abstract

This paper analyzes how the link between earnings quality and financial performance is interplayed and decides which an originating cause within the link is.It further investigates whether that connection is mediated by organizational reputation.A survey of 194 firm-year observations of Vietnamese publicly listed companies appeared on the 50 best companies list voted by Forbes Vietnam from 2012 to 2015 discovers that earnings quality plays an originating role within the vicious linkage where earlier earnings quality is a cause of current financial performance that in turn affects subsequent earnings quality.The presence of organizational reputation partially mediates the effect of earlier earnings quality on current financial performance, but it fully mediates the effect of current financial performance on subsequent earnings quality.Therefore, executive managers and accounting researchers in the world in general and in emerging economies such as Vietnam in particular should deeply consider the vicious link between earnings quality and financial performance, and the mediation of organizational reputation when analyzing earnings performance.

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