Earnings Management Using Classification Shifting: An Examination of Core Earnings and Special Items
Posted: 4 Nov 2005
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Earnings Management Using Classification Shifting: an Examination of Core Earnings and Special Items
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: Suggested Citation