Do independent directors and big-4 audit firms limit classification shifting: evidence from Indian firms

Abstract

PurposeThis study investigates the moderating role of Big-4 audit firms on the association between board independence and classification shifting (CS) in Indian firms.Design/methodology/approachThis study has employed a fixed-effect panel data regression model to analyze the sample data. Board independence is measured by taking the proportion of independent directors on a firm’s board. CS is measured from the core earnings expectation model (McVay, 2006). Principal Score Matching is applied to validate the results.FindingsBased on 6,016 firm-year observations of Indian firms listed on the Bombay Stock Exchange, results show that firms with a higher proportion of independent directors on board are effective in limiting expense CS. Further, firms that Big-4 audit firms audit play a significant role in curbing expense CS. Overall, results also exhibit that Big-4 audit firms significantly influence the association between board independence and CS.Originality/valueThis study is one of its kind to examine the moderating role of Big-4 audit firms between board independence and CS.