Industry Window Dressing
AbstractWe explore a new mechanism through which investors take correlated shortcuts. Specifically, we exploit a regulatory provision governing firm classification into industries: A firm’s industry classification is determined by the segment that has the majority of sales. We find strong evidence that investors overly rely on this primary industry classification. Firms just above the industry classification cutoff have significantly higher betas with respect to, as well as more sector mutual fund holdings and analyst coverage from, that industry, compared to nearly identical firms just below the cutoff. We then show that managers undertake specific actions to exploit investor shortcuts. Firms around the discontinuity point of 50% sales are significantly more likely to have just over 50% of sales from a “favorable” industry. Further, these firms just over the cutoff have significantly lower profit margins and inventory growth compared to other firms in the same industries, consistent with these firms slashing prices to increase sales. These same firms, however, do not exhibit different behaviors in any other aspect of their business (e.g., CapEx or R&D), suggesting that it is not a firm-wide shift of focus. Last, firms garner tangible benefits from switching into favorable industries, such as engaging in significantly more SEOs and stock-financed M&As.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Financial Markets Group in its series FMG Discussion Papers with number dp719.
Date of creation:
Date of revision:
Contact details of provider:
Web page: http://www.lse.ac.uk/fmg/
This paper has been announced in the following NEP Reports:
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (The FMG Administration).
If references are entirely missing, you can add them using this form.