Income Classification Shifting and Mispricing of Core Earnings

Posted: 13 Jun 2013

See all articles by Elio Alfonso

Elio Alfonso

Florida International University

C.S. Agnes Cheng

Hong Kong Polytechnic University - School of Accounting and Finance

Shanshan Pan

Louisiana State University, Baton Rouge - Department of Accounting

Date Written: June 11, 2013

Abstract

This study examines whether the market misprices core earnings (operating income before depreciation and special items) when firms use income classification shifting tactics to boost their core earnings. Previous large sample U.S. studies relate shifted core earnings estimates with future returns and find weak associations. We classify our samples as classification shifters or non-shifters based on various estimation methods and provide strong large sample evidence that the market overprices the core earnings provided by the classification shifters in a nontrivial fashion. While classification shifting tactics do not affect total accruals, we find evidence that the extent of accruals mispricing is stronger for the classification shifters. Our findings are timely given the Security and Exchange Commission's recent concerns of firms' income classification shifting behavior.

Suggested Citation

Alfonso, Elio and Cheng, C.S. Agnes and Pan, Shanshan, Income Classification Shifting and Mispricing of Core Earnings (June 11, 2013). Available at SSRN: https://ssrn.com/abstract=2277640

Elio Alfonso

Florida International University ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

C.S. Agnes Cheng (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong

Shanshan Pan

Louisiana State University, Baton Rouge - Department of Accounting ( email )

E.J. Ourso College of Business Administration
2800 Business Education Complex
Baton Rouge, LA 70803
United States

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