A Study On Motivation And Method Of Classification Shifting Earnings Management In China's Listed Companies

Earnings management has always been a hot issue in the accounting field.Domestic and foreign scholars have conducted a lot of research around their motives,economic consequences,and governance mechanisms.And they focus on accrued earnings management and real earnings management.However,there is a third type of earnings management method-classification shifting earnings management.This earnings management method achieves the goal of inflating the core profit and improving the profit structure by misclassifying the core expense items as non-core items without changing the net profit.The motivation for this method from the fact that investors and analysts in the capital market have given higher valuation weights to the persistent earnings of the core earnings,and believe that the core earnings can continue into the next period.The higher the proportion of core earnings,the higher the total earnings in the next period.This is based on an effective capital market.In contrast,in China's capital market,there are many individual investors,whose characteristics of lacking of rationality.They often focus only on the net earnings,and they cannot fully understand the earnings structure information.It cannot be coupled with the characteristics of the classification shifting.At the same time,China's capital market has the characteristics of being an executive-led one.The role of supervisors cannot be ignored.Most of them have relevant financial backgrounds,including certified public accountants,senior accountants,and professors of financial management.When there are professional accounting information users paying special attention to earnings structure information,such as the review process of initial public offerings(IPO),the classification shifting earnings management behaviors can be adjusted to meet the regulators.Therefore,in China,there is a motive for classification shifting to cater to regulators.This paper takes the IPO as the observation point and uses 1,243 listed companies in China's A-share market IPO during the period of 2007-2016 to test whether there are classification shifting earnings management behaviors,their motives and specific methods.The study finds that:(1)Under the condition of China's capital market,under normal circumstances,there is no significant classification shifting behavior to inflate the core earnings.And in the context of IPO,the listed companies generally have the behavior of classification shifting.The comparative results show that the behavior of the classification shifting earnings management of listed companies in China is mainly motivated by catering to regulators.(2)In the selection method of classification shifting earnings management,listed companies transfer operating costs to non-operating expenses,and increase gross profits and core profits in an indefinite manner.They do not transfer period expenses to non-operating expenses.(3)External audits have an impact on the behavior of classification shifting earnings management.High-quality auditing can inhibit the company's classification shifting behavior.The Big-Four audited companies do not have classification shifting earnings management behaviors.The non-Big-Four audited companies have classification shifting earnings management behavior.Based on the background of China's capital market system,this paper studies the motives and specific methods of the third type of earnings management in China,and finds the existence and motivation of China's listed company's classification shifting earnings management behavior.The paper has enriched the empirical evidence of the classification shifting earnings management in China,and has reference and enlightenment effect on inhibiting the listed company's classification shifting earnings management and improving the resource allocation efficiency of capital market.