The BP oil spill and income classification shifting of oil and gas companies

Abstract

Literature has documented income classification shifting to increase core earnings. There has been little research on whether firms reduce income increasing classification shifting or classification shift to reduce core earnings - classify non-core items as core expenses. Also, research on classification shifting under non-market incentives is limited. We fill these gaps by examining the shifting behavior of oil and gas firms in response to the BP oil spill. The oil spill was an unexpected event that led to regulations and restrictions, as well as adverse publicity. This could have encouraged petroleum firms to suppress core earnings. We show that after the oil spill, (1) the likelihood of petroleum firms' classification shifting to inflate core earnings declines relative to other firms and (2) the likelihood of petroleum companies' shifting to report lower core earnings increases relative to other firms.