The Role of Managerial Ability in Classification Shifting Using Discontinued Operations

Abstract Prior research suggests that managers engage in classification shifting using discontinued operations as an earnings management tool. The authors investigate the role of managerial ability in this type of classification shifting because prior research links high ability managers to reduced levels of earnings management. Using a large sample from 1988 to 2014, the authors find that more-able managers better mitigate the extent of classification shifting using discontinued operations. The authors also find that our results are mainly driven by firms with income-decreasing discontinued operations.