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The role of industry classification in estimating discretionary accruals

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  • Karel Hrazdil
  • Thomas Scott

Abstract

This study compares the properties of the Global Industry Classification Standard (GICS) with three alternatives: Standard Industrial Classification, North American Industry Classification System, and Fama–French classification. First, we demonstrate that GICS results in more reliable industry groupings for financial analysis and research; in particular, we find that estimations of performance-adjusted discretionary accruals (PADA) based on GICS significantly outperform estimates derived using each of the three alternative classifications systems in capturing discretionary accruals. Second, we show that the difference between GICS and the other systems can provide significantly different results, and hence different inferences, in empirical studies that rely on industry classification. Specifically, we revisit findings by Teoh et al. (J Financ 53[6]:1935–1970, 1998a ) and assess the conclusion that initial public offering (IPO) issuers with high abnormal accruals during the IPO year experience subsequent poorer long-term stock performance than issuers with low discretionary accruals do. We find that this result disappears when PADA estimates are based on GICS. Our results call for serious consideration of using GICS classifications in research, either in the primary analysis or as a necessary corroboration. Copyright Springer Science+Business Media, LLC 2013

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  • Karel Hrazdil & Thomas Scott, 2013. "The role of industry classification in estimating discretionary accruals," Review of Quantitative Finance and Accounting, Springer, vol. 40(1), pages 15-39, January.
    • Handle: RePEc:kap:rqfnac:v:40:y:2013:i:1:p:15-39
    DOI: 10.1007/s11156-011-0268-6
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    Cited by:

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    3. Li, Scott & Liu, Qianqiu & Refalo, James, 2020. "Industry classification, product market competition, and firm characteristics," Finance Research Letters, Elsevier, vol. 36(C).
    4. Michael G. Marsh & Marc Muchnick, 2019. "Asset Pricing Model Estimation Errors During Rational And Irrational Investor Behavior Periods," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 13(2), pages 45-69.
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    7. Zura Kakushadze & Willie Yu, 2017. "Open Source Fundamental Industry Classification," Papers 1706.04210, arXiv.org, revised Dec 2017.
    8. Li, Scott, 2022. "Industry classification, industry momentum and short-term reversal," Finance Research Letters, Elsevier, vol. 48(C).
    9. Kousenidis, Dimitrios V. & Ladas, Anestis C. & Negakis, Christos I., 2013. "The effects of the European debt crisis on earnings quality," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 351-362.
    10. Camillo Lento & Julie Cotter & Irene Tutticci, 2016. "Does the market price the nature and extent of earnings management for firms that beat their earnings benchmark?," Australian Journal of Management, Australian School of Business, vol. 41(4), pages 633-655, November.
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    More about this item

    Keywords

    Discretionary accruals; Industry classification; GICS; IPO; G12; G14;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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