Earnings Management by Classification Shifting and IPO Survival

52 Pages Posted: 3 Dec 2019 Last revised: 29 Dec 2020

See all articles by Seraina C. Anagnostopoulou

Seraina C. Anagnostopoulou

University of Piraeus, Department of Banking and Financial Management

Dimitrios Gounopoulos

University of Bath

Kamran Malikov

University of Essex

Hang Pham

University of Essex - Essex Business School

Date Written: November 19, 2020

Abstract

The study examines the effect of earnings management by classification shifting on firm success, focusing on the survival of newly listed firms. We argue that shifting income-decreasing expenses from core to special items should negatively associate with future operating performance because of improper signaling of actual repeatable core profitability. We find that classification shifting strongly and negatively affects future Initial Public Offering (IPO) success and survival. We further identify the economic mechanisms that drive this finding and observe that our results are mitigated when the quality of external corporate governance alleviating agency concerns is stronger, also for IPO firms operating within stronger business contexts. Therefore, in an environment that facilitates firm survivability, the existence of weaker than reported sustainable performance may not end up materializing in the form of lower firm survivability as these factors aid firms’ continuing operations from a business perspective. Our findings provide evidence of the longer-term implications of a method of earnings management that has long been considered “soft” and without any longer-term reversing consequences.

Keywords: classification shifting; income manipulation; investor protection; initial public offering; ipo survival

JEL Classification: M41; M48; G14; G30; G32

Suggested Citation

Anagnostopoulou, Seraina C. and Gounopoulos, Dimitrios and Malikov, Kamran and Pham, Hang, Earnings Management by Classification Shifting and IPO Survival (November 19, 2020). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3493585 or http://dx.doi.org/10.2139/ssrn.3493585

Seraina C. Anagnostopoulou

University of Piraeus, Department of Banking and Financial Management ( email )

80 Karaoli & Dimitriou Str.
Piraeus, 18534
Greece

Dimitrios Gounopoulos (Contact Author)

University of Bath ( email )

School of Management,
Wessex House, Claverton Down
Bath, BA2 7AY
United Kingdom

Kamran Malikov

University of Essex ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Hang Pham

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

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