Income Classification Shifting And Pricing Of Investors

Earnings management is showing real economic activity and to cover up mistakes, traditional earnings management are the "accruals management" and "manipulation of real transactions." There were few researcheson the classification shifting of themethod of earnings management, which did not change the net profit.The income statement items were misclassified, as operating expenses shifted intonon-operating expenses,thereby exaggerating thecore earnings. This means the earnings management statements misclassification do not sacrifice the future performance of the company, at a lower cost; while net profit unchanged, relatively more subtle, often ignored by auditors and regulators.The essay examines whether the market misprices core earnings when firms use income classification shifting tactics to exaggerate their core earnings. Using a large a sample data from2008 to 2012, We mainly use Sloan (1996).Mishkin framework is mainly used to evaluate whether all samples and classification shifters’core earnings are reasonably priced. We found in prediction of core earnings and accrualsin follow-up periods, the shifters’core earnings and accrualsaresustainability higher than non-shifters’. And our findings show that the investors overprice core earnings of shifters’than non-shifters’and the difference is significant, suggesting that investors do not see through classification, and overpricing core earnings.However, we found that the non-core earnings’persistenceof shifters’is higher than non-shifters’. We also found that market underprices the non-core earnings of shifters’and significantlyunder 10% level, and showedthat the market underreacts to the shifters’ non-core earnings.Our research shows that investors cannot detect the overstated core earnings.This confirms managers opportunisticallyengage in this type of profit manipulation, consequently affecting the company’s market value. Our study confirmed that some companies may useclassification shiftingtechniques to changeearning structure,causingnegative economic impact. Given that it is relatively easier to manage earnings by using income classification shifting tactics and its significant negative impact on resource allocation, more research should be done in this field.