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Business strategy and classification shifting: Indian evidence

Business strategy and classification shifting: Indian evidence This study aims to investigate the impact of business strategy on the classification shifting practices of Indian firms.Design/methodology/approachThe study considered cost leadership and differentiation strategy. Two forms of classification shifting, namely, expense misclassification and revenue misclassification have been examined in this study. Panel data regression models are used to analyze the data for this study.FindingsThe results show that managers of cost leadership strategy firms are more likely to be engaged in expense misclassification, whereas firms following differentiation strategy are likely to be engaged in revenue misclassification. Subsequent tests of this study suggest that firms following a hybrid strategy (mix of cost leadership and differentiation) prefer revenue misclassification over expense misclassification for reporting inflated operating performance. These results imply that firms prefer the shifting tool based on the ease and need of each shifting strategy. These results are consistent with several robustness measures.Practical implicationsThe results suggest that investors should understand business strategy before developing insights about the accounting quality of firms. Investors should conduct a comprehensive review of income statement items before using items for portfolio evaluation.Originality/valueTo the best of the authors’ knowledge, this is the first study to examine the association between business strategy and classification shifting. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting in Emerging Economies Emerald Publishing

Business strategy and classification shifting: Indian evidence

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References (73)

Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
2042-1168
DOI
10.1108/jaee-03-2021-0099
Publisher site
See Article on Publisher Site

Abstract

This study aims to investigate the impact of business strategy on the classification shifting practices of Indian firms.Design/methodology/approachThe study considered cost leadership and differentiation strategy. Two forms of classification shifting, namely, expense misclassification and revenue misclassification have been examined in this study. Panel data regression models are used to analyze the data for this study.FindingsThe results show that managers of cost leadership strategy firms are more likely to be engaged in expense misclassification, whereas firms following differentiation strategy are likely to be engaged in revenue misclassification. Subsequent tests of this study suggest that firms following a hybrid strategy (mix of cost leadership and differentiation) prefer revenue misclassification over expense misclassification for reporting inflated operating performance. These results imply that firms prefer the shifting tool based on the ease and need of each shifting strategy. These results are consistent with several robustness measures.Practical implicationsThe results suggest that investors should understand business strategy before developing insights about the accounting quality of firms. Investors should conduct a comprehensive review of income statement items before using items for portfolio evaluation.Originality/valueTo the best of the authors’ knowledge, this is the first study to examine the association between business strategy and classification shifting.

Journal

Journal of Accounting in Emerging Economies – Emerald Publishing

Published: Jan 17, 2023

Keywords: Classification shifting; Business strategy; Cost leadership; Differentiation

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