The impact of using tax havens on classification shifting: Evidence from public and private UK firms

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The impact of using tax havens on classification shifting: Evidence from public and private UK firms. / Abdelrahman, Mahmoud; Hemmings, Danial; Jaafar, Aziz.
In: Journal of Accounting Literature, 24.01.2025.

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TY - JOUR

T1 - The impact of using tax havens on classification shifting: Evidence from public and private UK firms

AU - Abdelrahman, Mahmoud

AU - Hemmings, Danial

AU - Jaafar, Aziz

PY - 2025/1/24

Y1 - 2025/1/24

N2 - 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.

AB - 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.

KW - Tax havens

KW - Offshore financial centres

KW - Classification shifting

KW - Publicly listed firms

KW - Private firms

KW - Earnings management

M3 - Article

JO - Journal of Accounting Literature

JF - Journal of Accounting Literature

SN - 0737-4607

ER -