Classification Shifting in an International Setting: Investor Protection and Financial Analysts Monitoring

Abstract

ABSTRACT Prior research on publicly traded U.S. firms provides evidence that managers engage in classification shifting to opportunistically manage “core” earnings. We extend this line of research in a broader international setting, by examining (1) whether the level of investor protection affects managers' decisions to engage in classification shifting behavior and (2) whether coverage by financial analysts mitigates this behavior. Based on an international sample of firms from 40 countries, we observe evidence consistent with classification shifting in both strong and weak investor protection countries using four separate measures of investor protection. We then explore the potential monitoring role of financial analysts in mitigating classification shifting. We provide evidence that higher financial analyst following mitigates classification shifting, primarily in weak investor protection countries. Overall, our results provide evidence of classification shifting in a broad international setting and evidence of financial analysts' influence in reducing this form of earnings management. Data Availability: The data are available from public sources identified in the text.