Earnings Management using Affiliated Transactions
Date Issued
2009
Date
2009
Author(s)
Ku, Yu-Fan
Abstract
This thesis examines if firms use affiliated transactions to manage earnings by classification shifting. Classification shifting involves reporting revenues, expenses, gains, and losses on a different line in the income statement than they should properly appear under GAAP. My results show that, in the parent company report, firms with both income-decreasing special items and income from investments have significantly larger unexpected core earnings than firms reporting either item alone. Consistent with McVay (2006), we also find unexpected core earnings reverses the year after a firm reports special items and income from investments, indicating that the use of both special items and income from investment to increase core earnings is a one-time event. This evidence is consistent with our prediction that incomes from investments are used by firms to manipulate core earnings because of its differing nature from special items.
Subjects
Affiliated transactions
Classification shifting
Core earnings
Special items
Income from investment
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