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

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

Accepted Paper Series