Influence of firm size and firm age on classification shifting: an empirical study on listed firms in India

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Manish Bansal
Keyword(s):  
Earnings Management ◽  
Initial Public Offering ◽  
Performance Metrics ◽  
Relative Advantage ◽  
Content Type ◽  
Income Statement ◽  
Study Results ◽  
Uniform Sample ◽  
Classification Shifting ◽  
Operating Revenue

Purpose Prior studies document that managers engaged in shifting of non-operating revenue to operating revenue (revenue shifting) and shifting of operating expenses to non-operating expenses (expense shifting (ES)) within income statement to report inflated operating profits of firms. This study aims to identify the factors affecting revenue shifting and ES. Design/methodology/approach The operating revenue model (Malikov et al., 2018) and the core earnings expectation model (McVay, 2006) are used for measuring revenue shifting and ES, respectively. The panel data regression models are used to analyze the data for this study. Findings The study results show that large and old firms are engaged in revenue shifting, whereas small and young firms prefer ES over revenue shifting for reporting inflated operating profits. These results imply that firms choose the shifting strategy based on relative advantage and ease in execution. The results are robust after controlling for accruals earnings management, real earnings management and endogeneity bias. Practical implications It suggests investors minutely investigate the operating performance metrics of initial public offering firms that are relatively small and young while buying their shares. Besides, findings suggest accounting standard setters make more mandatory disclosure requirements for recording expense and revenue items in the income statement to curb this corporate misfeasance of classification shifting. Originality/value This is among the earlier attempts to identify firm-specific factors that incentivize firms to prefer one form of shifting over another. Second, the study jointly examines both forms of shifting by taking a uniform sample of firms over the same period. Most of the prior studies have examined one form at a time.

Gross profit manipulation in emerging economies: evidence from India

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Manish Bansal ◽  
Ashish Kumar ◽  
Vivek Kumar
Keyword(s):  
Relative Advantage ◽  
Gross Margin ◽  
Content Type ◽  
Panel Data Regression ◽  
Data Regression ◽  
Study Results ◽  
Uniform Sample ◽  
Expectation Model ◽  
Peer Performance ◽  
Profit Manipulation

Purpose This study aims to explore peer performance as the motivation behind gross profit manipulation through two different channels, namely, cost of goods sold (COGS) misclassification and revenue misclassification. Design/methodology/approach Gross profit expectation model (Poonawala and Nagar, 2019) and operating revenue expectation model (Malikov et al., 2018) are used to measure COGS and revenue misclassification, respectively. The panel data regression models are used to analyze the data for this study. Findings The study results show that firms engage in gross profit manipulation to meet the industry’s average gross margin, implying that peer performance is an important benchmark that firms strive to achieve through misclassification strategies. Further results exhibit that firms prefer COGS misclassification over revenue misclassification for manipulating gross profit, implying that firms choose the shifting strategy based on the relative advantage of each shifting tool. Practical implications The findings suggest that firms that just meet or slightly beat industry-average profitability levels are highly likely to engage in classification shifting (CS). Thus, investors and analysts should be careful when evaluating such firms by comparing them with other firms in the same industry. Originality/value First, this study is among earlier attempts to investigate CS motivated by peer performance. Second, this study investigates both tools of gross profit manipulation by taking a uniform sample of firms over the same period and provides compelling evidence that firms prefer one shifting tool over another depending on the relative advantage of each shifting tool.

Auditors' Responses to Classification Shifting: Evidence from U.S. Firms

2021 ◽  
Author(s):  
Mai Dao ◽  
Hongkang Xu ◽  
Trung Pham
Keyword(s):  
Earnings Management ◽  
Audit Fees ◽  
Real Earnings Management ◽  
Audit Report ◽  
Audit Opinion ◽  
Income Statement ◽  
Financial Restatements ◽  
Classification Shifting ◽  
Financial Misstatements

This study examines how auditors react to clients' engagement in classification shifting which refers to the intentional misallocation of line items within the income statement. We find that classification shifting is positively associated with audit fees, audit report lags, the issuance of a modified audit opinion, and auditor resignations. Additional analyses show that auditors' responses to multiple-year classification shifting are similar to our main findings. We further find that classification shifting is associated with a higher likelihood of financial misstatements in the classification shifting year, and future announcements of financial restatements. We also find that the probability of future restatements is even higher when audit clients engage in both classification shifting and real earnings management. Overall, our results imply that auditors become more cautious in response to audit clients' classification shifting behavior.

An integrated adoption model for Islamic credit card: PLS-SEM based approach

2018 ◽  
Vol 9 (3) ◽  
pp. 308-335 ◽  
Author(s):  
Dariyoush Jamshidi ◽  
Nazimah Hussin
Keyword(s):  
Conceptual Model ◽  
Credit Card ◽  
Structural Equation ◽  
Resistance To Change ◽  
The Body ◽  
Relative Advantage ◽  
Equation Modeling ◽  
Content Type ◽  
Study Results ◽  
Usage Behavior

PurposeOne challenge when launching new banking services is to overcome resistance to change so as to accelerate market acceptance. This is the case of Islamic credit card (ICC). In response, this study aims to develop a conceptual framework that combines the innovation diffusion theory (IDT) and the theory of reasoned action (TRA) with religious obligation and customer awareness to explain behavior intention and usage behavior of ICC. Design/methodology/approachTo test the conceptual model, the data are collected from 649 bank customers in Malaysia, and the structural equation modeling technique is used to test the forecasting model. FindingsThe study results support some relationships of IDT and TRA, such as relative advantage, compatibility, trialability, observability, attitude and also the customer awareness as a stronger predictor of intention of ICC. Originality/valueTo the author’s knowledge, there have not been any attempt to develop a conceptual model for identifying the factors that influence the adoption of ICC by integrating IDT and TRA and other added measures. Therefore, this study adds to the body of knowledge regarding ICC adoption studies by extending the IDT in this domain and integrating it with TRA as two well-established models in the area of acceptance and usage behavior studies.

The relationship between managerial entrenchment and accounting conservatism

2021 ◽  
Vol 19 (5) ◽  
pp. 612-631
Author(s):  
Mahdi Salehi ◽  
Ebrahim Ghanbari ◽  
Saleh Orfizadeh
Keyword(s):  
Corporate Governance ◽  
Fixed Effects ◽  
Balance Sheet ◽  
Accounting Conservatism ◽  
Content Type ◽  
Managerial Entrenchment ◽  
Conservative Accounting ◽  
Income Statement ◽  
Study Results ◽  
The Relationship

Purpose This study aims to assess the relationship between managerial entrenchment and accounting conservatism in Iran. Design/methodology/approach To test hypotheses, all listed companies on the Tehran Stock Exchange during 2013–2018 (six years) that qualified were selected. Given the defined limitations of the study, a total of 120 firms with 720 year-observations was selected. After collecting data and figures, they were analyzed using EViews software. Having presented the inferential model tests, the panel data with fixed effects model is chosen. Findings The study results indicate a positive and significant relationship between managerial entrenchment and unconditional conservatism presented in the income statement. Moreover, the authors find a meaningful relationship between managerial entrenchment and unconditional conservatism about the balance sheet. Practical implications Managers will be more aware of the positive consequences of employment optimal corporate governance such as conservative accounting. Such corporate governance is likely to serve their interest in the long run by providing positive signals to the equity owners and board of directors. Originality/value By assessing conservatism’s literature in Iran, we observe many studies on this concept. Still, no investigation is carried out on the relationship between conservatism in accounting and managerial entrenchment. The present study is innovative because it evaluates the relationship between managerial entrenchment and two types of conservatism, namely, balance sheet and income statement conservatism, which have never been investigated by prior studies, notably in emerging markets.

The relationship between managerial entrenchment, earnings management and firm innovation

2018 ◽  
Vol 67 (9) ◽  
pp. 2089-2107 ◽  
Author(s):  
Mahdi Salehi ◽  
Mahbubeh Mahmoudabadi ◽  
Mohammad Sadegh Adibian
Keyword(s):  
Emerging Markets ◽  
Earnings Management ◽  
Significant Relationship ◽  
Cash Flows ◽  
Production Costs ◽  
Firm Innovation ◽  
Content Type ◽  
The Real ◽  
Managerial Entrenchment ◽  
Study Results

PurposeThe purpose of this paper is to evaluate the qualitative effect of corporate governance components, in the form of managerial entrenchment index, on earnings management and innovation.Design/methodology/approachIn this study, the variable of managerial entrenchment, which includes the variables of management independence, dual role of management, management tenure, the board compensation and the board ownership percentage, was initially estimated through the exploratory factor analysis and its effect was evaluated on the dependent variables of the study using the test of multivariable regressions. Hence, a total of 103 listed companies on the Tehran Stock Exchange were selected and analyzed during 2011–2016. In this paper, the Jones model is used as the variable of accrued earnings management and for calculating the real earnings management, the models of abnormal operational cash flows, abnormal production costs and abnormal optional costs are employed. Moreover, the research and development cost to total costs ratio is used for calculating the innovation.FindingsThe results indicate a negative and significant relationship between managerial entrenchment and accrual-based earnings management; moreover, the entrenched managers are less likely to engage in manipulating the real activities accruals in Iran context. Furthermore, the findings show that there is a positive and significant relationship between managerial entrenchment and firm innovation.Originality/valueWhat really sets this paper apart from other studies is that this research will make aware investors and stakeholders of this fact that managerial entrenchment will be a good way to diminish the manipulation of financial reporting and improve the corporate situation in emerging markets, particularly those bazaars facing with economic sanctions such as Iran. Undeniably, the study results will complete the knowledge gap between the developed economies and the emerging markets.

Classification shifting: impact of firm life cycle

2017 ◽  
Vol 15 (2) ◽  
pp. 180-197 ◽  
Author(s):  
Neerav Nagar ◽  
Kaustav Sen
Keyword(s):  
Earnings Management ◽  
Design Methodology ◽  
Emerging Market ◽  
Management Technique ◽  
Content Type ◽  
Operating Income ◽  
Firm Life Cycle ◽  
Special Items ◽  
Classification Shifting ◽  
Practical Implications

Purpose This paper aims to examine whether firms in the decline stage of lifecycle manipulate core or operating income through misclassification of operating expenses as income-decreasing special items. Design/methodology/approach The sample comprises of firms from an emerging market, India with data from 1996 to 2011. The paper uses the methodology given in McVay’s (2006) work and multiple regressions. Findings Managers of Indian firms also engage in classification shifting, primary incentive being the desire to avoid reporting of operating losses. Furthermore, the use of classification shifting is dependent upon the stage of lifecycle in which firm is in. Specifically, firms in the decline stage of lifecycle are more likely to use classification shifting to avoid reporting of operating losses. Practical implications The paper sheds light on a critical phase of the firm lifecycle, decline, which increases the possibility of the use of classification shifting, an earnings management technique which is tough to detect. Firms in decline, thus, may be trying to fool the investors who are infusing capital to save the company from going bankrupt; regulators, who are likely to focus less on troubled firms; and auditors, who may not be expecting core income manipulation in such firms. Originality/value The paper extends the literature on classification shifting and presents first evidence that such shifting is more likely to take place during the decline phase of firm lifecycle.

Earnings management using revenue classification shifting – evidence from the IFRS adoption period

2017 ◽  
Vol 25 (3) ◽  
pp. 333-355 ◽  
Author(s):  
Minyoung Noh ◽  
Doocheol Moon ◽  
Laura Parte
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Securities And Exchange Commission ◽  
Unintended Consequences ◽  
Content Type ◽  
Publicly Traded Companies ◽  
Ifrs Adoption ◽  
Classification Shifting ◽  
Core Earnings ◽  
Earnings Targets

Purpose This paper aims to provide evidence of an unintended observable consequence of International Financial Reporting Standards (IFRS) adoption by examining opportunistic use of earnings management through revenue as well as expense items classification shifting in the year of transition. Design/methodology/approach To document classification shifting, the authors take advantage of the Korean mandatory IFRS adoption in 2011, when broad discretion was given to publicly traded companies’ managers to present operating profits. Findings It is found that companies strategically use both revenues and expenses to manage core earnings at the time of transition by shifting other income as a common tactic to improve their operating performance and special expenses just to meet or beat earnings targets. Originality/value Given the concerns of the Securities and Exchange Commission (SEC) about classification shifting behavior and the debate over whether the SEC should mandate the use of IFRS for US companies, the findings of this study are timely and contribute to authors’ understanding of the unintended consequences of mandatory IFRS adoption.

Impact of IPO grading on earnings management

2015 ◽  
Vol 13 (2) ◽  
pp. 142-158 ◽  
Author(s):  
Yogesh Maheshwari ◽  
Khushbu Agrawal
Keyword(s):  
Earnings Management ◽  
Initial Public Offering ◽  
Design Methodology ◽  
Discretionary Accruals ◽  
Alternative Measure ◽  
Cross Sectional ◽  
Content Type ◽  
Public Offering ◽  
The Impact ◽  
First Time

Purpose – This paper aims to examine the impact of initial public offering (IPO) grading on earnings management by Indian companies in their IPOs. Specifically, it investigates whether earnings management significantly differs in the pre-IPO grading regime and post-IPO grading regime. Further, it examines whether earnings management significantly differs between high-graded and low-graded IPOs. Design/methodology/approach – The cross-sectional modified Jones model is used to obtain the discretionary accruals, a proxy for earnings management. The impact of IPO grading on earnings management is assessed using multiple regression analysis. Findings – Earnings management is significantly lower in graded IPOs as compared to the ones that are not graded. Further, among the graded IPOs, the high-graded IPOs exhibit lower earnings management as compared to the low-graded IPOs. The findings are robust to the use of an alternative measure for discretionary accruals. Originality/value – IPO grading in India is a unique certification mechanism, introduced for the first time in any market. This paper establishes the efficacy of this mandatory certification mechanism in reducing earnings management. The findings could be valuable to issuer companies, investors and market regulators.

scholarly journals The effect of disclosure regulation on the bias and accuracy of management earnings forecasts in Malaysian IPO prospectuses

2017 ◽  
Vol 15 (1) ◽  
pp. 59-77 ◽  
Author(s):  
Mohammed Abdullah Ammer ◽  
Nurwati A. Ahmad-Zaluki
Keyword(s):  
Initial Public Offering ◽  
Voluntary Disclosure ◽  
Earnings Forecasts ◽  
Management Earnings Forecasts ◽  
Multivariate Statistical ◽  
Disclosure Regulation ◽  
Content Type ◽  
Study Results ◽  
The Impact

Purpose This paper aims to examine the impact of disclosure regulation on the levels of bias and accuracy in management earnings forecasts disclosed in the prospectuses of Malaysian initial public offering (IPO). Specifically, the authors investigated the two environments of regulation (mandatory versus voluntary) to draw some conclusions regarding the benefits of regulating disclosure of management earnings forecasts. Design/methodology/approach A sample of 111 Malaysian IPOs listing on the Main Market of Bursa Malaysia from January 1, 2004 to February 29, 2012 was used. The paper uses both univariate and multivariate statistical analyses on this sample of IPOs. Findings The empirical results of these multivariate regressions indicated that disclosure regulation has positive and significant impact on the bias and accuracy of management earnings forecasts disclosed in IPO prospectus. In general, the study results suggest that using disclosure regulation to improve the quality of IPO earnings forecasts can be, to some extent, an effective strategy. Practical implications The findings of this study have important implications for regulators and investors. The findings can provide them some relevant insights on the improvements to the earnings forecasts accuracy and trends of the forecast (optimistic or pessimistic) after the change from mandatory to voluntary disclosure. Thus, the authorities may learn whether this change is an effective policy or whether the regime of mandatory disclosure was better for IPO companies and should be reversed. Originality/value This study is regarded as the first attempt to investigate the impact of reforms in disclosure regulation on the quality of management earnings forecasts of IPO prospectuses in a developing nation such as Malaysia. In spite of this, the paper focuses on a single country, and it contributes significant insights to the debate about the credibility of IPO management earnings forecasts.

Impact of upward and downward earnings management on stock returns

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Asgar Ali ◽  
Manish Bansal
Keyword(s):  
Earnings Management ◽  
Stock Returns ◽  
Stock Return ◽  
Momentum Effect ◽  
Cross Sectional ◽  
Content Type ◽  
Uniform Sample ◽  
The Impact ◽  
Moderating Role

PurposeThe current study aims at examining the impact of upward and downward earnings management on the cross-sections of stock return. The study also examines the moderating role of cross-sectional effects on the association between earnings management and stock returns.Design/methodology/approachThe study employed univariate and bivariate-sorted portfolio-level analysis to investigate the issue. Fama–Macbeth cross-sectional regression is used to analyze the moderating role of different cross-sectional effects. The study used a sample of 3085 Bombay Stock Exchange (BSE) listed stocks spanning over 20 years from January 2000 to December 2019.FindingsThe findings suggest that investors have different perceptions toward different forms of earnings management. In other words, results exhibit that investors perceive downward earnings management as an element of risk; hence, they discount the returns at a higher rate. On the contrary, results show that upward earnings management is positively perceived by the investors; hence, they hold the stocks even at a lower rate of return. This relation is found to be consistent even after controlling the impact of marker effect, size effect, value effect and momentum effect.Originality/valueThis study is among pioneering studies that consider the direction of earnings management while examining its impact on the stock return. This study is also among the earlier attempts to examine the moderating role of four different cross-sectional effects by taking a uniform sample of stocks over the same period.

Sign in / Sign up

Export Citation Format

Share Document