Business strategy and classification shifting: Indian evidence

Abstract

PurposeThis 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.