The Persistence and Valuation Effects of Classification Shifting

40 Pages Posted: 31 May 2019

See all articles by Gabriele Lattanzio

Gabriele Lattanzio

Southern Methodist University (SMU) - Finance Department

Wayne B. Thomas

University of Oklahoma

Date Written: May 8, 2019

Abstract

Classification shifting is defined in the literature as managers’ intentional classification of certain core expenses as income-decreasing special items with the intent to inflate reported core performance. We show that firms’ propensity to engage in this reporting strategy is persistent over time and relates to its use by peer firms. We also find that this strategy is associated with higher year-ahead firm value and stock returns. As one possible channel through which this valuation effect originates, we find that classification shifting allows firms to increase their debt capacity, consistent with firms shifting risks from shareholders to debtholders. Our tests are implemented using a new firm-year measure of classification shifting that can be broadly applied in many other research settings.

Keywords: Classification shifting; special items; persistence; peer effects; valuation

JEL Classification: M4, M40, M41

Suggested Citation

Lattanzio, Gabriele and Thomas, Wayne B., The Persistence and Valuation Effects of Classification Shifting (May 8, 2019). Available at SSRN: https://ssrn.com/abstract=3384962 or http://dx.doi.org/10.2139/ssrn.3384962

Gabriele Lattanzio (Contact Author)

Southern Methodist University (SMU) - Finance Department ( email )

United States

Wayne B. Thomas

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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