The Impact of Industry Classification Schemes on Financial Research

Abstract

This paper investigates industry classification systems. During the last 50 years there has been a considerable discussion of problems regarding the classification of economic data by industries. From my perspective, the central point of each classification is to determine a balance between aggregation of similar firms and differentiation between industries. This paper examines the structure and content of industrial classification schemes and how they affect financial research. I use classification systems provided by the Worldscope and the Compustat database. First, this study gives a detailed description of the structure and methodology of industrial classification systems and the relevance in leading finance and accounting journals.Second, I construct a benchmark classification system to measure the performance of different systems and provide evidence that some systems a more homogeneous in terms of value drivers than others. Third, I examine how multiple valuation is influenced by industry classification and show that the results vary significantly for different systems. * I would like to thank Roumiana Slavova for her support, Ernst Maug, Ingolf Dittmann and Niels Ulbricht for helpful discussions and comments. I gratefully acknowledge support by the Rudolf von Bennigsen-Foerder foundation and the Deutsche Forschungsgemeinschaft through the SFB 649 "Economic Risk".

Constructing economic taxonomy reflecting firm relationships based on news reports

“…The industry usually classifies products and enterprises by various classification standards, such as the SIC, ICB, and NAICS (Pierce and Schott, 2012). This application of information studies in economics is also the starting point for many economic studies (Weiner, 2005). Boettcher (1999) noted that the NAICS has made a significant contribution to industrial classification and compared the differences between the NAICS and SIC in the study, noting that the NAICS guarantees the integrity of the classification system from the perspective of multisource data.…”

Impact of Information Technology (IT) Security Information Sharing among Competing IT Firms on Firm’s Financial Performance: An Empirical Investigation

“…The GICS classification structure comprises 10 broad economic sectors aggregated from 23 industry groups, 59 industries, and 122 sub-industries. We selected GISC over other available classification mechanisms such as SIC and NAIC because it outperforms others in explaining financial ratios and lowering valuation errors (Bhojraj, Lee, & Oler, 2003;Weiner, 2005). Given we focus on financial performance ratios and their use in IS research (Chang, Jackson, & Grover, 2003;Du, Huai, & Liu, 2006;Martin & Mykytyn, 2009;Mojsilovic, Ray, Lawrence, & Takriti, 2007;Schumaker & Chen, 2010;Shu, 2010), adopting GISC seems appropriate.…”

“…Given we focus on financial performance ratios and their use in IS research (Chang, Jackson, & Grover, 2003;Du, Huai, & Liu, 2006;Martin & Mykytyn, 2009;Mojsilovic, Ray, Lawrence, & Takriti, 2007;Schumaker & Chen, 2010;Shu, 2010), adopting GISC seems appropriate. While we chose GICS over SIC (Bhojraj et al, 2003;Martin & Mykytyn, 2009;Weiner, 2005) and, therefore, differ from Santhanam and Hartono (2003), we did adopt the general approach of both Santhanam and Hartono (2003) and Martin and Mykytn (2009) in testing our hypotheses at two levels of the classification system (sub-industry and industry group) to strengthen the findings. Table 2 shows the final list of GICS sub-industries and industry groups whose firm members we included as control firms in testing our multi-level hypotheses based on the mapping of IT-ISAC firms to the most granular classification category (GICS sub-industries).…”

“…Although prior IS literature has evaluated the role and impact of information sharing in organizations and acknowledged the role of IT security information, our research question remains relevant for the following reasons. Despite calls to empirically evaluate the benefits of IT security-related information sharing (ENISA, 2010) and numerous quantifications of individual and industry-wide costs of specific security breaches (Cavusoglu, Cavusoglu, & Raghunathan, 2004a;Cavusoglu, Mishra, & Raghunathan, 2004b, 2004b, 2005 no research has investigated the impact of IT security information sharing on firm's financial performance. In addition, the existing literature fails to provide a theoretical foundation that can explain why firms' engagement in IT security information would impact firm's financial performance or act as potential motivation to engage in sharing IT security information.…”

Visualizing the clustering of financial networks and profitability of stocks

“…A variety of industry classification systems have been adopted for defining stock affiliation, such as the Standard Industrial Classification, the Global Industry Classification System and the Fama and French [18] system. Weiner [19] evaluated several industrial classification schemes, and found a number of drawbacks for each one. On the other hand, a significant amount of statistical classification models have been applied to common stock analysis, in the areas including common stock investment categories, price-earnings and return-risk equity classification, information content and return performance, and capital structure [20].…”