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 distorts users' understanding of a company's financial performance—without changing net income. Agency theory and corporate governance frameworks emphasize the board of directors' role in mitigating distortions in financial reporting and enhancing the transparency. Given the ever-increasing complexity of the business environment and the sensitivity to financial information quality, this study examines 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 listed on the Tehran Stock Exchange over a 17-year period from 2008 to 2024, resulting in 2040 firm-year observations. The data were analyzed using a quantile-on-quantile approach, implemented in MATLAB and EViews software. The findings indicate an alignment, regarding the impact of different quantiles of corporate governance on varying quantiles of misclassification errors in operating revenues, operating expenses, and operating income. Specifically, in higher quantiles (firms with significant misclassification errors in revenues, expenses, and operating income), the coefficients were positive and statistically significant, suggesting that improved corporate governance in these firms is associated with increased misclassification errors in revenues, expenses, and operating income. Conversely, in lower quantiles (firms with minimal classification errors), the coefficients were negative and significant, indicating that enhanced corporate governance reduces misclassification errors in revenues, expenses, and operating income. In middle quantiles (firms with moderate classification errors), the coefficients were close to zero and statistically insignificant. These findings highlight that the impact of corporate governance on misclassification errors in revenues, expenses, and operating income is highly quantile-dependent. This paradoxical pattern underscores the heterogeneity of corporate governance's role and emphasizes the need for future research.

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References

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Journal of Accounting Advances
Volume 17, Issue 1
September 2025
Pages 115-147

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History

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

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