ABSTRACT: This study investigates whether managers use classification shifting to manage earnings when reporting discontinued operations. Using a methodology similar to McVay (2006), we find evidence consistent with the hypothesis that firms shift operating expenses to income-decreasing discontinued operations to increase core earnings. Our findings also indicate that managers use classification shifting to meet or beat analysts’ forecasts. Finally, we find that, since the introduction of SFAS No. 144, the reporting frequency of discontinued operations has increased; however, the magnitude of classification shifting has decreased. We provide potential explanations for this finding.

Using hand-collected information, we find that analysts who own stock in a company they follow make more informative recommendations and exert more effort in covering the company. However, we also find that analysts with stock ownership issue more optimistic target price forecasts. These findings suggest that analysts’ stock ownership enhances the credibility of their recommendations by conveying their superior information, but also induces analysts to bias upwards their target price forecasts. Surprisingly, we find that 56% of analysts owning stock terminate their ownership while having a buy recommendation outstanding, suggesting a potentially widespread violation of the regulations on analysts’ research.