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Earnings Management Using Classification Shifting: an Examination of Core Earnings and Special Items

The Accounting Review, Vol. 81, pp. 501-531, 2006

55 Pages Posted: 28 Jul 2005 Last revised: 8 Mar 2010

Sarah E. McVay

University of Washington

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2006

Abstract

This paper examines the classification of items within the income statement as an earnings management tool. Evidence is consistent with managers opportunistically shifting expenses from core expenses (cost of goods sold and selling, general, and administrative expenses) to special items. This vertical movement of expenses does not change bottom-line earnings, but overstates core earnings. In addition, it appears that managers use this earnings management tool to meet the analyst forecast earnings benchmark, as special items tend to be excluded from both pro forma and analyst earnings definitions.

Keywords: Earnings Management, Earnings Components, Special Items, Analyst Forecasts

JEL Classification: M41, M43, G29

Suggested Citation

McVay, Sarah E., Earnings Management Using Classification Shifting: an Examination of Core Earnings and Special Items (October 1, 2006). The Accounting Review, Vol. 81, pp. 501-531, 2006 . Available at SSRN: https://ssrn.com/abstract=768424

Sarah E. McVay (Contact Author)

University of Washington ( email )

Box 353200
Seattle, WA 98195-3200
United States

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