Revisiting the real earnings management and corporate performance nexus: new insights from Eisenegger and Imhof's reputation theory

Purpose This study revisits the nexus between real earnings management (REM) practices and corporate performance, and examines whether corporate reputation moderates this relationship, in the context of sub-Saharan African. Design/methodology/approach The study uses panel data from 203 listed non-financial firms across twelve (12) sub-Saharan African stock markets from 2014 to 2023. A corporate reputation index is constructed based on Eisenegger and Imhof's reputation theoretical perspective – functional, social, and expressive reputations. Least squares dummy variable (LSDV) two-way fixed effect regression models are used to test the formulated hypotheses, and GMM to address endogeneity concerns. Findings The results show that REM negatively impacts corporate performance. Corporate reputation is found to positively moderate this negative relationship, mitigating the adverse effects of REM on performance. The moderating effect is stronger for firms with weaker corporate governance. These findings align with the self-regulation and expectancy violation theories, as well as the reputation-building hypothesis, suggesting that managers of reputable firms adopt self-regulating attitudes, are less incentivized to engage in REM, and are more concerned about meeting stakeholders' expectations to maintain their reputations. Practical implications The findings suggest that reputation-building can serve as a complementary strategy to strengthen existing corporate governance mechanisms in mitigating opportunistic REM practices, especially in contexts with weak institutional environments. Originality/value This study provides new insights into the role of corporate reputation in constraining earnings management and enhancing corporate performance in emerging markets. It introduces an alternative method of measuring reputation for firms not covered by popular reputation ratings such as Fortune Magazine and RepRisk.