Identifying classification shifting using Bayesian latent method : international evidence of the impact of legal environment and culture

Mamatzakis, Emmanuel and Tsionas, Mike (2025) Identifying classification shifting using Bayesian latent method : international evidence of the impact of legal environment and culture. Journal of Accounting Literature, 47 (4). pp. 836-855. ISSN 0737-4607

Abstract

Purpose This study proposes a new model to measure unexpected core earnings, using Bayesian dynamic latent method. Design/methodology/approach The Bayesian dynamic latent modelling approach identifies the effects that stem from complex, multidimensional variables related to culture and legal framework, on unexpected core earnings. It also allows testing whether there is persistence over time in unexpected core earnings. We use sequential Bayesian Monte Carlo methods, also known as particle filtering, that simplify estimations. Findings In an international empirical application, we find evidence of persistence in unexpected core earnings as well as classification shifting. The impact of the legal framework on classification shifting shows variability across samples. Religion reduces classification shifting, whereas the cultural variables of power distance, masculinity, and uncertainty avoidance enhances it. Interestingly, the persistence in unexpected core earnings is strong and moderates the ability of legal framework and religion in abating classification shifting. Research limitations/implications In terms of policy implications, we show that strengthening legal framework would improve financial reporting and reduce the scope for manipulation. This could involve stricter enforcement mechanisms, increased penalties for non-compliance, and regular audits to detect and deter classification shifting practices. Given that religion plays a role in moderating classification shifting, policymakers may explore partnerships or collaborations with religious institutions to promote ethical financial practices. Engaging religious leaders and organizations can help emphasize the importance of integrity and ethical behaviour in financial reporting, potentially influencing the behaviour of individuals and organizations. Originality/value To the best of our knowledge this is the first study that opts for Bayesian dynamic latent model for an international sample.