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

Posted: 4 Nov 2005

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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. Accounting Review, May 2006, Available at SSRN: https://ssrn.com/abstract=838804

Sarah E. McVay (Contact Author)

University of Washington ( email )

224 Mackenzie Hall, Box 353200
Seattle, WA 98195-3200
United States

HOME PAGE: http://https://foster.uw.edu/faculty-research/directory/sarah-mcvay/

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