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Earnings Management using Classification Shifting (Management Project)

In this paper we examine if managers of Swedish firms listed on OMX Large Cap engage in earnings management by shifting core expenses to income decreasing special items in order to increase core earnings, with other words classification shifting.

To measure classification shifting we use regression models by McVay to measure unexpected core earnings, this is the difference between the reported and expected core earnings, and unexpected change of core earnings.

By examining the relation between unexpected core earnings, unexpected change of core earnings and special items we find no significance evidence of classification shifting.

We also decompose the special items into two groups, those that are unsusceptible and those that are susceptible, and test these against unexpected core earnings and unexpected change of core earnings. Based on our sample on large firms, we find no significant relation.
Source: Uppsala University
Authors: Bondegård, Michael | David, La

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