Board Governance Mechanisms and Misclassification of Operating Revenues and Expenses: An Application of Quantile-on-Quantile Regression

Document Type : Research Paper

Author

Assistant Professor, Department of Accounting, Faculty of Economics Sciences and Administrative, University of Qom, Qom, Iran.

Abstract

Misclassification of operating revenues and expenses presents a distorted view of financial performance, without altering net income, for users of corporate financial information. Agency theory and corporate governance emphasize the board role in mitigating distortions in financial reporting and its transparency. Given the increasing complexity of the business environment and heightened sensitivity to the quality of financial information, this study aims to determine how different quantiles of board governance mechanisms influence various quantiles of classification errors in income statement items, including operating revenues, operating expenses, and ultimately operating income. The study collected data from 120 companies over a 17-year period from 2007 to 2025. The data were analyzed using a quantile-on-quantile approach with MATLAB and EViews. The findings indicate complete alignment in the statistical test results regarding the impact of different quantiles of corporate governance on varying quantiles of misclassification of operating revenues, operating expenses, and operating income. in higher quantiles, the coefficients were positive and statistically significant, suggesting that improved corporate governance in these firms is associated with increased misclassification of revenues, expenses, and operating income. in lower quantiles, the coefficients were negative and significant, indicating that enhanced corporate governance reduces misclassification of revenues, expenses, and operating income. In middle quantiles, the coefficients were close to zero and statistically insignificant. These findings highlight that the impact of corporate governance on misclassification errors in income is highly quantile-dependent. This paradoxical pattern underscores the heterogeneity of corporate governance's role and emphasizes the need to explore underlying factors in future research.

Keywords

Main Subjects

References

Aflatooni, A., Arjmand, F., & Mahdiqoli, M. (2023). Investigating the behavior of income statement items’ reclassification: The effect of CEO tenure. Financial Accounting, 15(58), 76–90. (In Persian).
Anagnostopoulou, S. C., & Malikov, K. T. (2024). The real consequences of classification shifting: Evidence from the efficiency of corporate investment. European Accounting Review, 33 (4), 1549–1577. http://dx.doi.org/10.2139/ssrn.3801959.
Athanasakou, V., Strong, N. C., & Walker, M. (2009). Earnings management or forecast guidance to meet analyst expectations? Accounting and Business Research, 39(1), 3–35. https://doi.org/10.1080/00014788.2009.9663347.
Balounejad nouri, R. , Shahidi, A. and saadatmehr, M. (2024). Non-linear relationship between exchange rate and inflation rate in Iran: A nonparametric quantile-on-quantile approach. Journal of Econometric Modelling, 9(1), 83-112. (In Persian).
Bansal, M., & Bashir, H. A. (2023). Business strategy and classification shifting: Indian evidence. Journal of Accounting in Emerging Economies, 13(1), 69–92. https://doi.org/10.1108/JAEE-03-2021-0099.
Beidleman, C. R., et al. (2020). Audit committee expertise and earnings management: Evidence from U.S. firms. Contemporary Accounting Research, 37(2), 891-917.
Chung, H., Kim, B.-J., Lee, E. Y., & Sunwoo, H.-Y. (2021). Debt financing and classification shifting of private firms. Managerial Auditing Journal, 36(7), 921–950. https://doi.org/10.1108/MAJ-03-2020-2575.
Dadashi, I. (2007). The impact of corporate governance on auditors’ decisions regarding risk and planning [Master’s thesis, Allameh Tabatabai University]. Faculty of Accounting and Management. (In Persian).
Dadashi, I. and Omidi, V. (2024). Impact of Geopolitical Risk on Price Indices of Selected Industries in the Tehran Stock Exchange: An Approach Based on QQC and SVAR Models. Iranian Journal of Economic Research, 29(101), 119-159. (In Persian).
Dechow, P. M., & Dichev, I. D. (2002). The quality of accruals and earnings: The role of accrual estimation errors. The Accounting Review, 77(s-1), 35-59.
Fan, Y., Fu, J., & Liu, X. K. (2024). Core earnings incentive contracts and classification shifting. SSRN. https://doi.org/10.2139/ssrn.4721471.
Filehsaraei, M., & Atashi Golestani, H. (2016). Agency theory, incentive contracts, and performance measurement criteria. Accounting and Auditing Studies, 5(18), 84–99. (In Persian).
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360.
Hamedi, S., Kurdloei, H. R., Ahmadi, F., Khanmohammadi, M. H., & Ghasemi, M. (2025). Investigating the simultaneous interactive effects of real earnings management, financial leverage, dividend payments, and firm value. Investment Knowledge, 14(55), 655–674. (In Persian).
Hamidian, M., Bozorgmehrian, S., & Jannat Makan, H. (2018). The role of auditor industry expertise in preventing opportunistic reclassification of income statement items. Financial Accounting and Auditing Research, 10(38), 93–113. (In Persian).
Klein, A. (2002). Audit committee, board of director characteristics, and earnings management. Journal of Accounting and Economics, 33(3), 375-400.
Lin, Y., et al. (2023). Board composition and financial reporting quality: Evidence from Chinese listed firms. Journal of Corporate Finance, 78, 102-123.
Liu, X., Yang, J., Di, R., & Li, M. (2022). CFO tenure and classification shifting: Evidence from China. Emerging Markets Finance and Trade, 58(6), 1578–1589. https://doi.org/10.1080/1540496X.2021.1904879.
Lotfi, F., & Mohammad dini, A. (2026). Proposing an optimal model for the internal audit evaluation process of issuers in compliance with professional standards (in line with Articles 8 and 9 of the corporate governance guidelines for issuers registered with the Securities and Exchange Organization). Investment Knowledge, 15(58), 327–366. (In Persian).
Malikov, K., Coakley, J., & Manson, S. (2019). The effect of the interest coverage covenants on classification shifting of revenues. The European Journal of Finance, 25(16), 1572–1590. https://doi.org/10.1080/1351847X.2019.1618888.
Malikov, K., Manson, S., & Coakley, J. (2018). Earnings management using classification shifting of revenues. The British Accounting Review, 50(3), 291–305. https://doi.org/10.1016/j.bar.2017.10.004
McVay, S. E. (2006). Earnings management using classification shifting: An examination of core earnings and special items. The Accounting Review, 81(3), 501–531. https://doi.org/10.2308/accr.2006.81.3.501.
Saghafi, A., & Jamalianpour, M. (2018). The role of reclassification in earnings management. Empirical Studies in Financial Accounting, 14(1), 1–23. (In Persian).
Sajjadi, Z., Balani, A., & Pariyad, A. (2023). The impact of audit committee characteristics on the relationship between ownership structure and profit reclassification. Accounting and Auditing Research, 15(60), 107–128. (In Persian).
Scott, W. (2020). Financial accounting theory (Vol. 1) (A. Parsaeian, Trans.). Tehran, Iran: Termeh Publishing. (Original work published 1931). (In Persian).
Shahmoradi, N. and Tabatabaienasab, Z. (2021). The effect of Audit Quality on the Relationship between Economic Uncertainty and Accrual Based Earnings Management in Listed Companies in Tehran Stock Exchange. Financial Accounting Research, 13(1), 67-86. (In Persian).
Talebnia, G. and Sedighikamal, L. (2017). Survey of comparing the effect of ownership type (public and private) on the earnings quality of firms listed in Tehran Stock Exchange. Accounting and Auditing Research, 9(34), 42-57. (In Persian).
Watts, R. L., & Zimmerman, J. L. (1986). Positive accounting theory. Prentice-Hall Inc.
 
Journal of Accounting Advances
Volume 17, Issue 1
September 2025
Pages 115-147

Files

History

  • Receive Date: 09 June 2025
  • Revise Date: 02 August 2025
  • Accept Date: 06 August 2025

Share

How to cite

Statistics