THE EFFECT OF CLASSIFICATION SHIFTING ON ANALYST FORECAST ACCURACY: EVIDENCE FROM JAPAN

Abstract

Accounting research has focused extensively on both discretionary accrual-based earnings management (DA) and real earnings management (REM). The third route of earnings management, classification shifting (CS), is a relatively new research area. First, this paper provides evidence that managers in Japan overstate operating income through classification shifting. Second, we find that analysts' forecast accuracy for operating income is reduced for firms that use frequent classification shifting to manipulate operating income upward. This paper can be helpful for regulatory agencies responsible for financial reporting quality when supervising or auditing the quality of firm's financial reporting. This paper also highlights investors' need to perform detailed reviews of firms' financial statements in their decision making.