Classification Shifting to 'Hide' Gains

60 Pages Posted: 28 Apr 2018 Last revised: 30 Jan 2019

See all articles by Juncheng (Ben) Hu

Juncheng (Ben) Hu

Bond University

Keith Duncan

Bond University - Accounting

Date Written: April 9, 2018


Conventional wisdom is that managers shift recurring expenses downwards into non-recurring losses (expense shifting) to inflate core earnings. McVay (2006) and subsequent researchers document that expense shifting is prevalent in a setting characterized by non-recurring losses that receive less attention from investors. We identify a setting where firms are more likely to engage in shifting gains upwards to sales revenues (gain shifting) than shifting expenses downwards. We use Chinese data because non-recurring items are mainly positive and bottom-line earnings are the official profitability benchmark for new equity offerings. We find that, when regulators exclude non-recurring gains from adjusted bottom-line earnings, firms are motivated to “hide” part of non-recurring gains within sales revenues to avoid the impact of the exclusion and the resulting reduction in bottom-line earnings.

Keywords: Classification shifting; Non-recurring items; Earnings management; Gains

JEL Classification: M41

Suggested Citation

Hu, Juncheng (Ben) and Duncan, Keith R., Classification Shifting to 'Hide' Gains (April 9, 2018). Available at SSRN: or

Juncheng (Ben) Hu (Contact Author)

Bond University ( email )

98 University Drive
Robina, QLD 4226

HOME PAGE: http://

Keith R. Duncan

Bond University - Accounting ( email )

Gold Coast, QLD 4229
07 55952238 (Phone)

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