Department

Accountancy

Document Type

Article

Publication Date

5-8-2014

Abstract

Prior literature has investigated three forms of earnings management: real earnings management (REM), accruals earnings management (AEM) and classification shifting. Managers make trade-off decisions among these methods based on the costs, constraints and timing of each strategy. This study investigates whether managers use classification shifting when their ability to use other forms of earnings management is constrained. We find that when REM is constrained by poor financial condition, high levels of institutional ownership and low industry market share, managers are more likely to use classification shifting. Further, we find that when AEM is constrained by low accounting system flexibility and the provision of a cash flow forecast, managers are more likely to use classification shifting. In addition, when we limit our sample to firms that are most likely to have manipulated earnings, we continue to find support for constraints of both REM and AEM leading to higher levels of classification shifting. We also find support for the hypothesis that the timing of each earnings management strategy influences managers’ trade-off decision. Our results indicate that managers use classification shifting as substitute form of earnings management for both AEM and REM.

Journal

Journal of Business Finance and Accounting

Journal ISSN

0306-686X

Volume

41

Issue

5

First Page

600

Last Page

626

Digital Object Identifier (DOI)

10.1111/jbfa.12076

Included in

Accounting Commons

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