Classification Shifting in the Cash Flow Statement: Evidence from India

41 Pages Posted: 4 Jan 2016

See all articles by Neerav Nagar

Neerav Nagar

Indian Institute of Management Ahmedabad

Kaustav Sen

Pace University - Lubin School of Business

Date Written: May 1, 2014

Abstract

We present first evidence that the manipulation of operating cash flows through misclassification is likely to be more common in the countries with weak investor protection and governance. We also show that managers manipulate operating cash flows using different misclassification strategies. Specifically, they shift operating cash outflows to investing and financing cash outflows, and investing and financing cash inflows to operating cash inflows. We focus on an emerging market, India, which is characterized by weak corporate governance and investor protection, and the United States and present evidence that the magnitude of such misclassification is higher for the firms in India. Further, Indian firms in financial distress are more likely to manipulate operating cash flows as compared to the financially distressed firms in the United States by engaging in the misclassification of cash flows. Thus, we link weak governance and investor protection with the magnitude of cash flow misclassification.

Keywords: Cash flow manipulation, Classification shifting, Operating cash flows, Financial distress

Suggested Citation

Nagar, Neerav and Sen, Kaustav, Classification Shifting in the Cash Flow Statement: Evidence from India (May 1, 2014). Pace University Accounting Research Paper No. 2016/01. Available at SSRN: https://ssrn.com/abstract=2710508 or http://dx.doi.org/10.2139/ssrn.2710508

Neerav Nagar (Contact Author)

Indian Institute of Management Ahmedabad ( email )

Vastrapur
Ahmedabad, Gujarat 380015
India

Kaustav Sen

Pace University - Lubin School of Business ( email )

1 Pace Plaza
New York, NY 10038-1502
United States
212 618 6413 (Phone)
212 618 6410 (Fax)

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