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A Theory of Principles-Based Classification

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Title:A Theory of Principles-Based Classification
Authors:Matjaž Konvalinka
Mark Penno
Jack Stecher
Keywords:Classification Shifting
Earnings Management
Date Issued:18 Aug 2020
Abstract:We study a firm's decision to classify transactions as recurring or nonrecurring in a setting with no fixed classification scheme, but with the following principle: recurring transactions must be more persistent than nonrecurring ones. Under this principle, equilibrium firm behavior provides a new explanation for the observed relationship between income and classifications. Moreover, we find that market prices are more informative under principles-based classifications than they would be under a hypothetical, optimally chosen specific classification rule
Appears in Collections: 17 Theory

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