Cost Classification Shifting on Earnings Predictability of Listed Firms in Kenya

Purpose: Cost classification shifting is a key managerial accounting practice that influences the predictability of earnings in listed firms. This study examines how cost classification shifting impacts earnings predictability among firms listed on the Kenya Methodology: This research utilizes panel regression analysis to examine how reclassifying costs affects the predictability of earnings, and the findings indicate a significant inverse relationship between the two. Sales, Selling general and Administrative costs as well as share price and Earnings per share data was collected for a purposive sample of 50 firms in listed in Kenya between 2010 and 2022 Findings: The overall firms analysis revealed a significant negative correlation between cost classification shifting and earnings predictability (r = -0.296, p < 0.01). The results imply that companies involved in cost reclassification are more likely to exhibit reduced earnings predictability. Cost classification shifting involves manipulating the allocation of expenses to different categories, which can distort financial reporting and hinder investors’ ability to accurately assess a company’s performance and future prospects. Value: The study findings suggest that cost shifting practices introduce volatility and reduce the transparency of financial statements, thereby affecting investor confidence and decision-making.