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Working Paper
Vasiliki Athanasakou, Per Olsson
Subject(s)
Finance, accounting and corporate governance
Keyword(s)
Earnings quality, business model, corporate governance, earnings management, accruals
We develop and test the proposition that earnings quality reflects both the scope for moral hazard (when associated mainly with volatile business fundamentals) and the outcome of moral hazard (when associated with management’s discretionary reporting choices). As a consequence, earnings quality can exhibit opposite sign associations with corporate governance structures depending on its source: business fundamentals (innate quality) and managerial incentives (discretionary quality). We provide consistent evidence in broad samples, using a methodology that splits earnings quality into an innate and discretionary component, and in subsamples likely to be dominated by either source of earnings quality. We further document interaction effects, i.e., corporate governance structures being increasingly effective on discretionary earnings quality as innate quality worsens. The study highlights the importance of specifying the source of earnings quality effects when researching associations with corporate governance, as a theoretical matter as well as in the empirical design.
Pages
50
Working Paper
Frank Ecker, Jennifer Francis, Per Olsson, Katherine Schipper
Subject(s)
Finance, accounting and corporate governance
We examine the payoffs to shareholders and CEOs of aggressive real behaviors and aggressive reporting behaviors. 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 real aggression and reporting aggression and separate links between each form of aggression and the payoffs to investors and CEOs. Results show real aggressiveness and reporting aggressiveness are positively correlated, that more aggressive real behaviors are associated with lower shareholder and CEO payoffs and that more aggressive reporting is associated with larger shareholder and CEO payoffs. An analysis of financial restatements, an extreme adverse financial reporting outcome of aggressiveness, yields three main findings. First, aggressive reporting is associated with a greater likelihood of restatement. Second, as compared to abnormal returns to nonrestatement firms, abnormal returns of aggressive-reporting restatement firms are significantly larger in the pre-restatement period and lower in the post-restatement period. Third, the adverse returns reaction to the restatement announcement does not eliminate the long-run positive returns of the pre-restatement period or the period for which results are restated. 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.
Pages
54