Managing Earnings Using Classification Shifting: Evidence From Quarterly Special Items

This paper examines whether and when managers shift core expenses to special items to inflate current core earnings. McVay (2006) concludes that, on an annual basis, managers opportunistically shift core expenses, resulting in a positive relation between unexpected core earnings and the amount of negative special items. However, Barua and Cready (2008) argue that McVay's (2006) findings may be the result of a research design problem. The results confirm the importance of controlling for model specification as suggested by Barua and Cready (2008). In addition, finding evidence consistent with shifting core expenses to negative special items for subsamples where it is more likely to be occurring supports McVay's (2006) conclusion that managers shift income.