Electronic Theses and Dissertations

Lidong Cui

Date

2025

Document Type

Dissertation

Degree Name

Doctor of Philosophy

Department

Accounting

Committee Chair

Steve Lin

Committee Member

James Lukawitz

Committee Member

Joanna Golden

Committee Member

Joseph Zhang

Committee Member

Philips Kunz

Abstract

Prior research finds that managers misclassify certain income statement line items as special items to inflate core earnings while leaving net income unchanged—a practice known as classification shifting. While most studies focus on the existence of this accounting-based earnings management tactic, relatively little is known about how to mitigate it. This three-chapter dissertation examines the relationship between key properties of financial reporting and classification shifting, focusing on: income statement line items and their comparability, the format of the income statement, and the reporting location of earnings distortions. In paper 1, we find that firms with more disaggregated income statement line items and those with line items more comparable to their industry peers exhibit reduced classification shifting. These findings are robust when using XBRL data and addressing potential endogeneity concerns. Further analysis demonstrates that the effectiveness of income line items in reducing classification shifting increases when investor and managerial interests are misaligned but decreases in the context of complex auditing environments. Furthermore, income statement line items effectively mitigate classification shifting associated with material and shiftable special items but have limited impact on earnings management through discontinued operations. Paper 2 focuses on income statement format. While about 73 percent of firms use the multiple-step format, substantial variation exists across and within industries. Empirical evidence suggests the multiple-step format is associated with lower levels of classification shifting and accrual-based earnings management, likely due to enhanced earnings transparency. Paper 3, using proprietary data from New Constructs to better distinguish core from transitory earnings, finds that income-decreasing nonrecurring items reported on the face of the income statement are more transitory than those disclosed in footnotes. Importantly, we detect classification shifting only when these components are presented on the face of the statement. Additional analysis reveals that managers continue to shift classifications to meet or exceed earnings benchmarks; however, this behavior can be curtailed by the use of a multiple-step format, which enhances transparency.

Comments

Data is provided by the student.

Library Comment

Dissertation or thesis originally submitted to ProQuest.

Notes

Embargoed until 08-04-2027

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Available for download on Wednesday, August 04, 2027

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