Predictors of revenue shifting and expense shifting: Evidence from an emerging economy

Prior literature established that managers engage in revenue shifting (RS) and expense shifting (ES) with an intent to report favorable operating performance of the firm. Our paper extends such research in a new direction by investigating both forms based on the need, ease, and advantage of each shifting strategy. The study aims at identifying firm-specific factors that incentivize firms to prefer RS over ES and vice-versa. We undertake a longitudinal study (2001-2019) using a sample size of 39,634 firm-years enlisted in the Bombay Stock Exchange (BSE). Our results show that peer performance, size, financial leverage, growth opportunities, accounting flexibility, age, and management compensation contracts are important determinants of RS and ES. Specifically, our results exhibit that large, levered, old, high-growth, sales-based target firms are engaged in RS, whereas small, young, firms with lesser accounting flexibility and firms operating below peer performance are involved in ES, consistent with the notion that firms choose the shifting tool based on ease, need and relative advantage of each tool. Our subsequent tests exhibit that firms engaged in RS have higher excess returns relative to ES firms, implying that investors perceive RS firms as growth firms, hence valuing them higher. Our results are robust to controlling for accruals-based earnings management, real earnings management, endogeneity, self-selection bias, and alternative measures of RS and ES. Our findings are helpful to auditors, analysts, and investors in improving awareness of forms of classification shifting.