The Real Consequences of Classification Shifting: Evidence from the Efficiency of Corporate Investment

52 Pages Posted: 11 Mar 2021 Last revised: 5 May 2022

See all articles by Seraina C. Anagnostopoulou

Seraina C. Anagnostopoulou

University of Piraeus, Department of Banking and Financial Management

Kamran Malikov

University of Essex

Date Written: April 21, 2022

Abstract

This study investigates the real consequences of earnings management, i.e., classification shifting, by examining its effect on corporate investment efficiency. The underlying expectation is that the ways of reporting different profit items within the income statement should induce information asymmetry between managers and capital providers regarding the level of core, and so more likely repeatable, firm performance. We anticipate that classification shifting will aggravate agency problems, and impede effective managerial learning from peers and the market pricing of the company’s own shares, when these factors should instead promote efficient investing. We find that classification shifting strongly and significantly decreases the responsiveness of investment to growth opportunities and is thus associated with more inefficient investing. After investigating the economic mechanisms explaining this association, our results are more pronounced when other information and agency problem-related factors that should protect against inefficient investing are weaker and also for firms whose managers show reduced signs of learning from peers and market participants about their own firm’s fundamentals. Our study provides evidence on the adverse real consequences of classification shifting, a form of earnings management without any bottom-line performance reversing effects, with reference to a very important firm-level outcome, namely efficient investing.

Online appendix available at http://ssrn.com/abstract=4089247.

Keywords: classification shifting, investment efficiency, over-investment, under-investment, earnings management, information asymmetry

JEL Classification: M40; M41, G10, G31

Suggested Citation

Anagnostopoulou, Seraina C. and Malikov, Kamran, The Real Consequences of Classification Shifting: Evidence from the Efficiency of Corporate Investment (April 21, 2022). Available at SSRN: https://ssrn.com/abstract=3801959 or http://dx.doi.org/10.2139/ssrn.3801959

Seraina C. Anagnostopoulou (Contact Author)

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

80 Karaoli & Dimitriou Str.
Piraeus, 18534
Greece

Kamran Malikov

University of Essex ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

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