Classification Shifting: Impact of Financial Distress

• In Event: Financial Accounting and Reporting 3

Abstract

Prior evidence on classification shifting suggests that managers shift core expenses to income-decreasing special items to inflate core earnings and to meet or beat earnings benchmarks (McVay 2006). In this paper, we shed light on another form of classification shifting and find that managers of Indian firms also engage in netting income-increasing special items against the core expenses to inflate core earnings. This income netting goes alongside the shifting of operating expenses to income-decreasing special items. We also link use of classification shifting with financial distress and show that distressed firms are more likely to engage in both types of classification shifting.

Authors

• Neerav Nagar, Indian Institute of Management–Calcutta

• Kaustav Sen, Pace University