The impact of board characteristics on classification shifting: evidence from Germany

Usman, Muhammad, Salem, Rami, Ezeani, Ernest ORCID: https://orcid.org/0000-0003-0401-9000 and Bilal, Bilal (2022) The impact of board characteristics on classification shifting: evidence from Germany. International Journal of Accounting and Information Management, 30 (5). pp. 565-582. ISSN 1834-7649

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Abstract

Purpose - This paper examines the relationship between Board Characteristics (BCs) on Classification Shifting (CS) among listed non-financial German firms. Design/methodology/approach - Using 870 firm-year observations of German non-financial firms from 2010 to 2019 listed on DAX, MDAX, and SDAX index, we examine the relationship between BCs (board size, board meetings, board independence, and board gender diversity) and CS. Findings - We found that managers of German firms use CS and move recurring expenses to non-recurring expenses to inflate their core earnings. Also, we found that board characteristics including board size, board independence, and board gender diversity have a mitigating effect on CS practices of German non-financial firms. However, the number of board meetings doesn’t influence EM. Implications: Our paper recommends that German firms’ board must be constituted with more independent members and female representation since these board mechanisms help to curb CS. Originality/value - The focus of this study is Germany, which is a bank-oriented economy with low transparency and investor protection. This paper provides new evidence on how BCs impact CS among German firms, whereas previous CS studies focused mainly on market-oriented economies like the US and the UK.