The impact of using tax havens on classification shifting: evidence from public and private UK firms
Abstract
Purpose
This paper empirically examines how tax haven use affects classification shifting by public and private UK firms.
Design/methodology/approach
The authors conduct multivariate regression analyses of classification shifting on proxies of tax haven use for a broad sample of UK non-financial public and private firms from 2010 to 2018. An array of additional tests is conducted to ensure the robustness of the findings.
Findings
Firms using tax havens engage in more classification shifting relative to those that do not. The result is concentrated for public firms. While private firms’ classification shifting is generally pronounced, it appears unaffected by tax haven use. The findings suggest that the use of tax havens facilitates public firms’ classification shifting due to the lower institutional environment quality of these jurisdictions. In addition, classification shifting may be a less costly earnings management device for public firms using tax havens due to their political sensitivity.
Practical implications
The study highlights the need for regulatory intervention to constrain classification shifting, especially when firms use tax havens. It also calls for further scrutiny by auditors and financial analysts on the classification of income statement items.
Originality/value
While prior research focuses on accrual and real earnings management by public firms, this study investigates the consequences of using tax havens on classification shifting, a largely underexplored but heavily exploited earnings management strategy. Differences between public and private firms are also tested. Overall, this study offers an advanced understanding of how a firm’s institutional and political environments influence its financial reporting.
Keywords
Acknowledgements
We are grateful to an anonymous reviewer for their constructive comments, which improved the quality of this paper. We extend our appreciation to Tom Smith, the editor, and Bruce Vanstone, the associate editor, for their invaluable support throughout the process. We are also grateful to Khaled Hussainey and Helen Rogers for their helpful feedback. Finally, we thank the attendees of the British Accounting and Finance Association (BAFA) annual conference at the University of Sheffield in April 2023 for their insightful comments on an earlier draft of the paper.
Citation
Abdelrahman, M., Hemmings, D. and Jaafar, A. (2025), "The impact of using tax havens on classification shifting: evidence from public and private UK firms", Journal of Accounting Literature, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JAL-08-2024-0189
Publisher
:Emerald Publishing Limited
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