Managing Earnings Using Classification Shifting: Evidence from Quarterly Special Items

The Accounting Review, Vol. 85, No. 4, pp. 1303–1323, July 2010

39 Pages Posted: 5 Oct 2009 Last revised: 7 Sep 2010

See all articles by Yun Fan

Yun Fan

University of Oklahoma - Steed School of Accounting

Abhijit Barua

Florida International University - School of Accounting

William M. Cready

University of Texas at Dallas - Naveen Jindal School of Management

Wayne B. Thomas

University of Oklahoma

Date Written: October 5, 2009

Abstract

McVay (2006) concludes that managers opportunistically shift core expenses to special items to inflate current core earnings, resulting in a positive relation between unexpected core earnings and income-decreasing special items. However, she further notes that this relation disappears when contemporaneous accruals are dropped from the core earnings expectations model. McVay (2006, 2008) calls for research to improve the core earnings expectations model and to provide additional cross-sectional tests of classification shifting. Using a core earnings expectations model that is not dependent on accrual special items, we show that classification shifting is more likely in the fourth quarter than in interim quarters. We also find more evidence of classification shifting when the ability of managers to manipulate accruals appears to be constrained and in meeting a range of earnings benchmarks. Overall, our evidence provides broad support for McVay’s (2006, 2008) conclusion that managers engage in classification shifting. Our study also sheds new understanding of the conditions under which managers are more likely to employ classification shifting.

Keywords: Classification shifting, special items, earnings thresholds, accruals manipulation constraints

Suggested Citation

Fan, Yun and Barua, Abhijit and Cready, William M. and Thomas, Wayne B., Managing Earnings Using Classification Shifting: Evidence from Quarterly Special Items (October 5, 2009). The Accounting Review, Vol. 85, No. 4, pp. 1303–1323, July 2010, Available at SSRN: https://ssrn.com/abstract=1483184

Yun Fan

University of Oklahoma - Steed School of Accounting ( email )

307 W Brooks
Norman, OK 73019
United States

Abhijit Barua

Florida International University - School of Accounting ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States
305-3483404 (Phone)

William M. Cready

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Wayne B. Thomas (Contact Author)

University of Oklahoma ( email )

Michael F. Price College of Business,
307 W Brooks, Rm 212B
Norman, OK 73019
United States
405-325-5789 (Phone)
405-325-7348 (Fax)

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