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Earnings Management Using Classification Shifting: an Examination of Core Earnings and Special Items


Sarah E. McVay


University of Washington

October 1, 2006

The Accounting Review, Vol. 81, pp. 501-531, 2006

Abstract:     
This paper examines the classification of items within the income statement as an earnings management tool. Evidence is consistent with managers opportunistically shifting expenses from core expenses (cost of goods sold and selling, general, and administrative expenses) to special items. This vertical movement of expenses does not change bottom-line earnings, but overstates core earnings. In addition, it appears that managers use this earnings management tool to meet the analyst forecast earnings benchmark, as special items tend to be excluded from both pro forma and analyst earnings definitions.

Number of Pages in PDF File: 55

Keywords: Earnings Management, Earnings Components, Special Items, Analyst Forecasts

JEL Classification: M41, M43, G29

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Date posted: July 28, 2005 ; Last revised: March 8, 2010

Suggested Citation

McVay, Sarah E., Earnings Management Using Classification Shifting: an Examination of Core Earnings and Special Items (October 1, 2006). The Accounting Review, Vol. 81, pp. 501-531, 2006 . Available at SSRN: http://ssrn.com/abstract=768424

Contact Information

Sarah E. McVay (Contact Author)
University of Washington ( email )
Box 353200
Seattle, WA 98195-3200
United States
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