Classification Shifting Using the ‘Corporate/Other’ Segment
May 6, 2013 Leave a comment
Classification Shifting Using the ‘Corporate/Other’ Segment
Bradley E. Lail Baylor University
Wayne B. Thomas University of Oklahoma – Michael F. Price College of Business
Glyn J. Winterbotham Winthrop University
April 26, 2013
Accounting Horizons, Forthcoming
Abstract:
In this paper, we examine management’s use of the “corporate/other” segment to mask the true performance of operating (or core) segments. The corporate/other segment represents firm-wide expenses not allocated to core segments. We find that managers take advantage of vague cost allocation requirements to shift expenses between the corporate/other segment and core segments. Specifically, in the presence of agency problems (i.e., transfer of resources to underperforming segments), our evidence is consistent with expenses being shifted from core segments to the corporate/other segment. This shifting increases the reported performance of underperforming core segments. In addition, when proprietary concerns are high (i.e., operations in less competitive industries), we find evidence consistent with corporate/other expenses being shifted to core segments. By shifting expenses to core segments, core profits are concealed when proprietary motives are present. Our research contributes to a growing literature on earnings manipulation through expense shifting (rather than accrual manipulation or real activities management).
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