Payoffs to Aggressiveness

We examine the payoffs to shareholders and CEOs of aggressive real behaviors and aggressive reporting behaviors. Using instruments selected from prior literature to construct latent variables for each aggressiveness construct, we estimate a structural equations model 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 real aggression and reporting aggression, and separate links between each form of aggression and the payoffs to investors and CEOs. Results show that real aggressiveness and reporting aggressiveness are positively correlated. Further, we 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. We analyze the latter finding in the context of prior research that reports negative market reactions to announcements of adverse reporting events, specifically, restatements. We show that our aggressive reporting measure is associated with a greater likelihood of restatements and that positive long-window pre-event returns exceed the negative returns at the restatement announcement. Our 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.