Income classification shifting and mispricing of core earnings

E. Alfonso, Cheng-shing Cheng, S. Pan

Research output: Journal article publicationJournal articleAcademic researchpeer-review

27 Citations (Scopus)

Abstract

This study examines whether the market misprices core earnings (operating income before depreciation and special items) when firms use income classification shifting tactics to boost their core earnings. We find that the market’s expectation of core earnings’ persistence is higher than the actual reported earnings persistence of firms that have shifted their core earnings. We also find that core earnings are more negatively associated with future returns for shifters than for non-shifters. Overall, we find strong evidence that the market overprices shifters’ core earnings. These results are robust to controlling for earnings management and real earnings management, endogeneity and self-selection, and using alternative measures of classification shifting. Our findings are timely given the Securities and Exchange Commission’s recent concerns of firms’ income classification shifting behavior.
Original languageEnglish
Pages (from-to)1-32
Number of pages32
JournalJournal of Accounting, Auditing and Finance
DOIs
Publication statusPublished - 2015

Keywords

  • Classification shifting
  • Mispricing
  • Anomalies

ASJC Scopus subject areas

  • Accounting
  • Economics, Econometrics and Finance (miscellaneous)
  • Finance

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