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Business strategy and classification shifting: Indian evidence

Manish Bansal (Accounting and Finance, Indian Institute of Management Ranchi, Ranchi, India)
Hajam Abid Bashir (Finance and Accounting, Indian Institute of Management Kashipur, Kashipur, India)

Journal of Accounting in Emerging Economies

ISSN: 2042-1168

Article publication date: 21 March 2022

Issue publication date: 17 January 2023

592

Abstract

Purpose

This study aims to investigate the impact of business strategy on the classification shifting practices of Indian firms.

Design/methodology/approach

The 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.

Findings

The 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 implications

The 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/value

To the best of the authors’ knowledge, this is the first study to examine the association between business strategy and classification shifting.

Keywords

Citation

Bansal, M. and Bashir, H.A. (2023), "Business strategy and classification shifting: Indian evidence", Journal of Accounting in Emerging Economies, Vol. 13 No. 1, pp. 69-92. https://doi.org/10.1108/JAEE-03-2021-0099

Publisher

:

Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

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