The Effect of Classification Shifting on Firm Success

52 Pages Posted: 3 Dec 2019

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 26, 2019

Abstract

The study examines the effect of earnings management by classification shifting on firm success, by 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 a) improper signaling of actual repeatable core profitability; and, more importantly b) in accordance with recent evidence by Cain, Kolev, and McVay (2019), suggesting a negative effect of opportunistic special items on future profits and cash flows. We find that classification shifting strongly and negatively affects future Initial Public Offering (IPO) success and survival. Our evidence indicates that this negative impact actually stems from adverse effects of non-transitory opportunistic special items, which constitute the tool for applying classification shifting, on future profits and operating cash flows, while our results are mitigated for IPO firms operating within stronger business contexts. Our findings provide evidence on the longer-term effects of a method of earnings management that has long been considered “soft,” and without any longer-term reversing consequences. Our evidence does not support this proposition in the case of newly listed IPO firms engaging in classification shifting around the time of issue.

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, The Effect of Classification Shifting on Firm Success (November 26, 2019). Available at SSRN: https://ssrn.com/abstract=3493585 or http://dx.doi.org/10.2139/ssrn.3493585

Seraina C. Anagnostopoulou (Contact Author)

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

80 Karaoli & Dimitriou Str.
Piraeus, 18534
Greece

Dimitrios Gounopoulos

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

Register to save articles to
your library

Register

Paper statistics

Downloads
45
Abstract Views
180
PlumX Metrics