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An intra- and inter-industry evaluation of three classification schemes common in capital market research

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  • Karel Hrazdil
  • Kim Trottier
  • Ray Zhang

Abstract

We compare the Standard Industry Classification (SIC), the North American Industry Classification System (NAICS) and the Global Industry Classification Standard (GICS) schemes in their effectiveness to group stocks with similar operating characteristics. We are the first to analyse and compare individual functional category levels within and across each industry classification and test whether the three industry classifications show significant improvement in homogeneity with finer industry partitions across a wide range of research applications. Our results suggest that the GICS system offers advantages over the other two systems in grouping firms across all its levels of industry categories and across different application schemes common to capital market research. However, the SIC and NAICS offer additional advantages across their finest industry partitions. Our study has important implications for users of industry classifications in various financial and economic analyses, research settings and regulatory contexts.

Suggested Citation

  • Karel Hrazdil & Kim Trottier & Ray Zhang, 2014. "An intra- and inter-industry evaluation of three classification schemes common in capital market research," Applied Economics, Taylor & Francis Journals, vol. 46(17), pages 2021-2033, June.
    • Handle: RePEc:taf:applec:v:46:y:2014:i:17:p:2021-2033
    DOI: 10.1080/00036846.2014.892200
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    Citations

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    Cited by:

    1. Zura Kakushadze & Willie Yu, 2017. "Open Source Fundamental Industry Classification," Data, MDPI, vol. 2(2), pages 1-77, June.
    2. Zura Kakushadze & Willie Yu, 2017. "Open Source Fundamental Industry Classification," Papers 1706.04210, arXiv.org, revised Dec 2017.
    3. Chung, Dennis Y. & Hrazdil, Karel & Trottier, Kim, 2015. "On the efficiency of intra-industry information transfers: The dilution of the overreaction anomaly," Journal of Banking & Finance, Elsevier, vol. 60(C), pages 153-167.
    4. Li, Scott & Liu, Qianqiu & Refalo, James, 2020. "Industry classification, product market competition, and firm characteristics," Finance Research Letters, Elsevier, vol. 36(C).
    5. Zhang, Jinhua & Mao, Rui & Wang, Jieyu & Xing, Mengying, 2021. "The way back home: Trading behaviours of foreign institutional investors in China amid the COVID-19 pandemic," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    6. Li, Scott, 2022. "Industry classification, industry momentum and short-term reversal," Finance Research Letters, Elsevier, vol. 48(C).

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