This study aims to seek out whether family business group (FBG) affiliated firms are involved in earnings management via classification shifting in Pakistan, an emerging economy.
In this research study, McVay’s (2006) core earnings model has been used as a proxy for classification shifting. The authors examined the study’s hypothesis using manually collected data from 286 Pakistan Stock Exchange (PSX) listed firms for the period of 2010–2019. The authors used the panel data regression models with robust analysis.
This study’s findings suggest that PSX-listed non-financial firms affiliated with FBG are not involved in classification shifting, while stand-alone firms are involved in it. This study’s findings are robust with alternative measures and the endogeneity problem.
The results of the study provide important implications for policymakers, investors and regulators. The evidence of classification shifting in the PSX-listed firms raises questions on the financial reporting quality, which may be used cautiously by the investors and regulators when evaluating PSX-listed non-financial firms’ financial reporting quality.
This research study is the first in nature to link FBG-affiliated firms with expense misclassification in an emerging market featuring the dominance of FBGs, weak corporate governance, prevalence of a type II agency problem and lower investor protection.
