Does Investor Sentiment Affects Firms Classification Shifting Activity?

Posted: 27 Dec 2021

See all articles by Abhinav Sharma

Abhinav Sharma

Indian Institute of Management Ahmedabad

Ajay Pandey

Indian Institute of Management Ahmedabad

Date Written: July 25, 2021

Abstract

Classification shifting is a low-cost earnings management tool wherein firms misclassify some of the items in their financial statements to inflate their core accounting numbers. Though classification shifting works as a substitute to accrual and real earnings management, it may face limited scrutiny of regulators and auditors Nelson et al. (2002) as there is no alteration in GAAP figures. We examine firms’ misclassification activity and its association with temporal changes in investor sentiment. We find that firms are more likely to lower their classification shifting activity in a high sentiment quarter relative to a lower one. The results remain consistent for alternate sentiment proxies as well. Our findings will not only have theoretical contributions but may have practical implications too for investors, auditors, and regulators.

Keywords: Classification shifting, Investor sentiment,Managerial opportunism, Earnings management

JEL Classification: G30,G40,M41

Suggested Citation

Sharma, Abhinav and Pandey, Ajay, Does Investor Sentiment Affects Firms Classification Shifting Activity? (July 25, 2021). Available at SSRN: https://ssrn.com/abstract=3993830

Abhinav Sharma (Contact Author)

Indian Institute of Management Ahmedabad ( email )

Vastrapur
Ahmedabad, 380015
India

Ajay Pandey

Indian Institute of Management Ahmedabad ( email )

Ahmedabad
India

HOME PAGE: http://www.iima.ac.in

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
264
PlumX Metrics