Classification Shifting and Earnings Predictability
Journal of Accounting, Auditing, & Finance
46 Pages Posted: 17 Dec 2018 Last revised: 26 Jan 2024
Date Written: October 12, 2023
Abstract
The literature measures classification shifting as the relation between unexpected core earnings and income-decreasing special items. The general view in this literature is that managers shift core expenses to special items to inflate core earnings to achieve self-motivated reporting objectives. However, an additional possibility is that classification shifting helps investors better predict future performance. We find evidence of this positive consequence of classification shifting. Our study raises the possibility that measures of classification shifting in certain settings do not reflect managers’ opportunistic reporting. Given the relatively limited evidence in the literature on the consequences of classification shifting on investors, we believe these findings need to be considered as the literature moves forward.
Keywords: classification shifting, core earnings, special items, earnings predictability, earnings management, FERC
JEL Classification: M41
Suggested Citation: Suggested Citation