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Industry Effects on Firm and Segment Profitability Forecasting: Do Aggregation and Diversity Matter?

Author

Listed:
  • Yim, Andrew
  • Schröder, David

Abstract

Abstract. A recent study shows that industry-specific analysis has no incremental advantage over economy-wide analysis in forecasting firm profitability. This result seems puzzling because some earlier studies have documented the importance of industry effects in explaining firm profitability. We reconcile the apparent inconsistency by showing that industry effects on profitability forecasting exist at the more refined business segment level, but are obscured by aggregated reporting at the firm level. Using segment-level analysis as well as firm-level analysis that also utilizes segment-level information, we provide consistent evidence supporting that industry-specific analysis is more accurate than economy-wide analysis in predicting the profitability of business segments and the profitability of single-segment firms.

Suggested Citation

  • Yim, Andrew & Schröder, David, 2012. "Industry Effects on Firm and Segment Profitability Forecasting: Do Aggregation and Diversity Matter?," MPRA Paper 39190, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:39190
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    File URL: https://mpra.ub.uni-muenchen.de/49025/1/MPRA_paper_49025.pdf
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    References listed on IDEAS

    as
    1. Juan Carlos Bou & Albert Satorra, 2003. "The persistence of abnormal returns at industry and firm levels," Economics Working Papers 729, Department of Economics and Business, Universitat Pompeu Fabra.
    2. repec:bla:joares:v:15:y:1977:i:2:p:226-244 is not listed on IDEAS
    3. Charles H. Brandon & Jeffrey E. Jarrett & Saleha B. Khumawala, 1983. "Note---Revising Forecasts of Accounting Earnings: A Comparison with the Box-Jenkins Method," Management Science, INFORMS, vol. 29(2), pages 256-263, February.
    4. Dichev, Ilia D. & Tang, Vicki Wei, 2009. "Earnings volatility and earnings predictability," Journal of Accounting and Economics, Elsevier, vol. 47(1-2), pages 160-181, March.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Zura Kakushadze & Willie Yu, 2017. "Open Source Fundamental Industry Classification," Papers 1706.04210, arXiv.org, revised Dec 2017.

    More about this item

    Keywords

    Segment profitability; Earnings predictability; Earnings persistence; Aggregation; Diversity; Industry membership;

    JEL classification:

    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G00 - Financial Economics - - General - - - General
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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