The effect of Global Reporting Initiative guidelines on classification shifting: the mediating role of shareholder protection score

Purpose This study aims to analyze the mediating effect of shareholder protection score on the relationship between adherence to Global Reporting Initiative (GRI) guidelines and classification shifting (CS). Design/methodology/approach The authors use a sample of 261 European companies selected from the STOXX 600 index from 2010 to 2022. The Feasible Generalized Least Squares regression method is used to estimate the econometric models. For robustness, the authors conducted a comparative analysis of the two dominant legal systems in the sample – the UK (common law) and France (civil law) – and incorporated a dynamic panel specification using the generalized method of moments to address endogeneity concerns. Findings The regression results reveal a significant positive relationship between unexpected core earnings and non-recurring items, confirming that European companies engage in CS. Furthermore, adherence to GRI guidelines significantly reduces this shifting. This relationship operates through a complementary partial mediation pathway, where the GRI’s effect is partially explained by its enhancement of the shareholder protection score. Practical implications This study contributes to the literature by bridging the gap between sustainability reporting and financial reporting quality, emphasizing the role of shareholder protection as a mediating mechanism. Policymakers and regulators can leverage these insights to encourage the adoption of GRI guidelines, thereby promoting ethical financial practices and improving investor trust. Originality/value While GRI guidelines aim to enhance corporate transparency and sustainability reporting, their impact on curbing unethical financial practices, such as CS, remains underexplored. Additionally, the role of shareholder protection score in mediating this relationship has not been adequately studied. This research addresses these gaps, offering novel insights into the interplay between sustainability reporting, financial reporting quality and shareholder trust.