Melbourne Accounting Research Seminar - Katherine Schipper

Professor Katherine Schipper from Duke University will present a MARS seminar.

Topic: Payoffs to Aggressiveness

Abstract: We examine the payoffs of aggressive real-actions and aggressive financial reporting to shareholders and CEOs. We use manifest proxies from prior literature to construct latent variables for each aggressiveness construct and estimate structural equations models of the associations between the two constructs and between the constructs and payoffs to shareholders (returns) and to CEOs (compensation). Our approach allows for a link between aggressive real-actions and aggressive financial reporting, and separate links between each form of aggression and the payoffs to investors and CEOs. Results show real-action aggressiveness and financial reporting aggressiveness are positively correlated, that more aggressive realactions are associated with lower shareholder and CEO payoffs and that more aggressive financial reporting is associated with larger shareholder and CEO payoffs. An analysis of financial restatements, an adverse outcome of aggressive reporting that is so extreme as to violate GAAP, yields three main findings. First, aggressive financial reporting is associated with a greater likelihood of restatement. Second, as compared to abnormal returns of non-restatement firms, abnormal returns of aggressivereporting restatement firms are significantly larger in the pre-restatement period and lower in the postrestatement period. Third, the adverse returns reaction to the restatement announcement does not eliminate the long-run positive returns of the pre-restatement period or of the period for which results are restated. Our findings suggest that, over long horizons, both investors and CEOs of aggressive financial reporting firms, including firms that experience significant and unusual adverse reporting events, benefit in the form of higher stock returns and higher compensation.