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

Abstract

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.

Impact of corporate life cycle on misclassification practices: evidence from IFRS adoption in India

“…The vast category of expenses provides greater flexibility to managers to misclassify expenses. Our finding of increased expense shifting practices under IFRS-converged standards is consistent with many prior studies (for instance, Bansal, 2021; Zalata and Roberts, 2016), where it has been found that IFRS are principle-based standards, hence offers greater scope to misclassify recurring expenses as non-recurring items.…”

“…Besides incentives, firms during this stage have a strong desire to maintain sales growth and meet analyst's sales forecasts. These results are consistent with the findings of Bansal (2021) that larger and older firms prefer revenue shifting over expense shifting for reporting inflated operating performance metrics due to sufficient opportunities and significant incentives.…”

Do independent directors and big-4 audit firms limit classification shifting: evidence from Indian firms

“…These variables are defined in Table 1. Due to higher supervision and regulations, largesized firms are not expected to engage in EM practices (Paiva et al, 2019;Bansal, 2021). Leverage is also considered a control variable as debt restricts managers from shifting classification due to restrictive covenants (Fan et al, 2019).…”

Business strategy and classification shifting: Indian evidence

“…Boahen and Mamatzakis (2020) examined the impact of cultural social norms on classification shifting and find a negative association, suggesting that managers' incentive to classification shifting is subdued under religious social norms environment. Among recent studies, Bansal (2021a, b) finds that firms during the high life cycle stage prefer revenue misclassification over expense misclassification for manipulating operating profit.…”

“…In India, the pressure to meet earnings targets and analysts' forecasts is the driving force for earnings management (Goel, 2014). Large and old firms are found to be engaged in revenue misclassification (Bansal, 2021a, b). Hence, it is likely that differentiators, being large firms, engage in revenue misclassification to inflate sales through revenue misclassification.…”