The real consequences of classification shifting: evidence from the efficiency of corporate investment
The real consequences of classification shifting: evidence from the efficiency of corporate investment
This study investigates the real consequences of classification shifting by examining its effect on corporate investment efficiency. The underlying expectation is that the ways of reporting different profit items within the income statement should increase information asymmetry between managers and capital providers regarding the level of core and, so, more likely repeatable firm performance. We anticipate that classification shifting will aggravate agency problems and distort managers’ own perceptions of their firms’ sustainable profitability, resulting in imperfect investment-related information sets for them, ultimately leading to inefficient investing. We find that classification shifting strongly and significantly decreases the responsiveness of investment to growth opportunities and is, thus, associated with less efficient investing. After investigating the economic mechanisms explaining this association, our results are more pronounced when other information and agency problem-related factors that should protect against inefficient investing are weaker, and also for firms whose managers have fewer opportunities to learn from peers, which could alleviate potential classification shifting-related distortion effects on managerial perceptions. Our study provides evidence on the adverse real consequences of classification shifting, a form of earnings management without any reversing effects for bottom-line future performance, with reference to a very important firm-level outcome; namely, efficient investing.
Anagnostopoulou, Seraina
4cacc617-9f13-4933-93a2-c635187f8ac0
Malikov, Kamran
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Anagnostopoulou, Seraina
4cacc617-9f13-4933-93a2-c635187f8ac0
Malikov, Kamran
c06bf7c0-0e21-4eda-9be3-4d85e9965d34
Anagnostopoulou, Seraina and Malikov, Kamran
(2023)
The real consequences of classification shifting: evidence from the efficiency of corporate investment.
European Accounting Review.
(doi:10.1080/09638180.2023.2200199).
Abstract
This study investigates the real consequences of classification shifting by examining its effect on corporate investment efficiency. The underlying expectation is that the ways of reporting different profit items within the income statement should increase information asymmetry between managers and capital providers regarding the level of core and, so, more likely repeatable firm performance. We anticipate that classification shifting will aggravate agency problems and distort managers’ own perceptions of their firms’ sustainable profitability, resulting in imperfect investment-related information sets for them, ultimately leading to inefficient investing. We find that classification shifting strongly and significantly decreases the responsiveness of investment to growth opportunities and is, thus, associated with less efficient investing. After investigating the economic mechanisms explaining this association, our results are more pronounced when other information and agency problem-related factors that should protect against inefficient investing are weaker, and also for firms whose managers have fewer opportunities to learn from peers, which could alleviate potential classification shifting-related distortion effects on managerial perceptions. Our study provides evidence on the adverse real consequences of classification shifting, a form of earnings management without any reversing effects for bottom-line future performance, with reference to a very important firm-level outcome; namely, efficient investing.
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Accepted/In Press date: 22 March 2023
e-pub ahead of print date: 21 April 2023
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Funding Information:
We are grateful to the Associate Editor, Professor Thorsten Sellhorn, and to two anonymous reviewers for very insightful comments and suggestions, which greatly improved our paper. We are also grateful to seminar participants at the University of Southampton, Kalin Kolev, Alaa Zalata, and Michi Nishihara, who has acted as a discussant for the paper, for helpful comments and suggestions. This paper has also benefited from comments and suggestions by the participants of the European Accounting Association Annual Conference 2022, Bergen, Norway, and the 8th Paris Financial Management Conference 2022, France. This work has also been partly supported by the University of Piraeus Research Center. All errors remain our own.
Publisher Copyright:
© 2023 European Accounting Association.
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Local EPrints ID: 476815
URI: http://eprints.soton.ac.uk/id/eprint/476815
ISSN: 0963-8180
PURE UUID: a4aef618-52aa-4de6-8ff1-9e234ed8fd1c
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Date deposited: 16 May 2023 17:01
Last modified: 21 Oct 2024 04:01
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Author:
Seraina Anagnostopoulou
Author:
Kamran Malikov
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