Please use this identifier to cite or link to this item: http://hdl.handle.net/10125/64785

THE CONTINUITY OF SPECIAL ITEMS AND THE LIKELIHOOD OF INCOME CLASSIFICATION SHIFTING

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Title:THE CONTINUITY OF SPECIAL ITEMS AND THE LIKELIHOOD OF INCOME CLASSIFICATION SHIFTING
Authors:Haeyoung Shin
Michael Lacina
Shanshan Pan
Keywords:earnings management
income classification shifting
special items
Date Issued:01 Jul 2019
Abstract:Income classification shifting is identified as the third form of earnings management that managers use, in addition to accrual-based and real earnings management. Income classification shifting is arguably less costly than the other two forms of earnings management (McVay 2006; Abernathy et al. 2014). However, there is a potential cost of classification shifting - the higher likelihood of missing the market expectations in subsequent periods because shifted core earnings of the current period 1) could bias upward analysts' forecasts for the subsequent periods and 2) would recur as core expenses unless firms can continuously shift their core expenses to special items in future periods. This paper hypothesizes that when firms have special items that allow them to shift income consecutively, they are more likely to engage in classification shifting by consecutively shifting, reducing potential costs. Consistent with expectations, the findings show that firms which report special items that tend to continue over multiple quarters (continuous special items) are more likely to classification shift than firms that report special items which tend not to continue over multiple quarters (non-continuous special items). Furthermore, this study documents that the difference in the likelihood of shifting between continuous and non-continuous special items is more pronounced for the first but not the last occurrence of a series of the same special item across time. The findings highlight the potential cost of classification shifting and its impact on a firm’s shifting behavior and offer valuable insight for investors and auditors when they assess the likelihood of classification shifting and the quality of earnings.
URI:http://hdl.handle.net/10125/64785
Appears in Collections: 08 Financial: Earnings Management/Earnings Smoothing


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