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

Abstract

PurposeThis paper aims to examine the relationship between board characteristics (BCs) on classification shifting (CS) among listed non-financial German firms.Design/methodology/approachUsing 870 firm-year observations of German non-financial firms from 2010 to 2019 listed on DAX, MDAX and SDAX index, this paper examines the relationship between BCs (board size [BS], board meetings [BM], board independence [BI] and board gender diversity [BGD]) and CS.FindingsThis study found that managers of German firms use CS and move recurring expenses to non-recurring expenses to inflate their core earnings. Also, this study found that BCs including BS, BI and BGD have a mitigating effect on CS practices of German non-financial firms. However, the number of BMs does not influence earnings management.Practical implicationsThis paper recommends that German firms’ board must be constituted with more independent members and female representation because these board mechanisms help to curb CS.Originality/valueThe 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 USA and the UK.