On April 6th, 2018, Frank Ecker (Frankfurt School of Finance & Management) presented his current research topic „Payoffs to Aggressiveness” (co-authored with Jennifer Francis, Duke University, Per Olsson, ESMT Berlin, and Katherine Schipper, Duke University, at the WHU Research Seminar in Finance & Accounting.
In their paper the authors examine the payoffs to both shareholders and CEOs of aggressive real behaviors and aggressive reporting behaviors. Using manifest proxies from prior literature to construct latent variables for each aggressiveness construct, they estimate structural equations models of the associations between the two constructs, and between the constructs and payoffs to shareholders (returns) and to CEOs (compensation). Their approach allows for a link between real aggression and reporting aggression, and separate links between each form of aggression and the payoffs to investors and CEOs. As expected, results show real aggressiveness and reporting aggressiveness are positively correlated. The authors further show that more aggressive real behaviors are associated with lower shareholder and CEO payoffs, and more aggressive reporting is associated with larger shareholder and CEO payoffs. They analyze the latter finding in the context of financial restatements as an example of an extreme adverse financial reporting outcome. They show that their aggressive reporting measure is associated with a greater likelihood of restatement, as well as significantly larger abnormal returns that are not eliminated by the adverse reaction to the restatement announcement itself. The authors´findings suggest that, over long horizons, both investors and CEOs of aggressive reporting firms, including firms that experience significant and unusual adverse reporting events, benefit in the form of higher stock returns and higher compensation.