Hostname: page-component-586b7cd67f-dsjbd Total loading time: 0 Render date: 2024-11-30T17:44:51.170Z Has data issue: false hasContentIssue false

The Impact of Industry Classifications on Financial Research

Published online by Cambridge University Press:  06 April 2009

Kathleen M. Kahle
Affiliation:
Katz Graduate School of Business, University of Pittsburgh, Pittsburgh, PA 15260
Ralph A. Walkling
Affiliation:
College of Business, Ohio State University, 1775 College Road, Columbus, OH 43210.

Abstract

Using approximately 10,000 firms jointly covered by Compustat and CRSP from 1974–1993, we find substantial differences in the SIC codes designated by the two databases. More than 36 percent of the classifications disagree at the two-digit level and nearly 80 percent disagree at the four-digit level. We examine the impact of these differences upon financial research in several ways. First, we show that the classification of utilities, financial firms, and conglomerate acquisitions are affected by the choice of CRSP vs. Compustat SIC codes. Second, we show that industry classification matters in financial research by illustrating that size- and industry-matched comparisons are more powerful than pure size matches. Third, we test the specification and power of Compustat vs. CRSP classifications by simulating a typical financial experiment in which sample firms are matched to control firms by industry. We find that: i) Compustat matched samples are more powerful than CRSP matched samples in detecting abnormal performance; ii) nonparametric tests outperform parametric tests; and iii) four-digit SIC code matches are more powerful than two-digit SIC code matches. These results are robust to the inclusion or exclusion of extreme values, and hold for both NYSE/AMEX and Nasdaq firms.

Type
Research Article
Copyright
Copyright © School of Business Administration, University of Washington 1996

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Agrawal, A., and Walkling, R. A.. “Executive Careers and Compensation Surrounding Takeover Bids.” Journal of Finance, 49 (1994), 9851014.CrossRefGoogle Scholar
Agrawal, A.; Jaffe, J. F.; and Mandelker, G. N.. “The Post-Merger Performance of Acquiring Firms: A Re-Examination of an Anomaly.” Journal of Finance, 47 (1992), 16051621.Google Scholar
Barber, B. M., and Lyon, J. D.. “Detecting Abnormal Operating Performance: The Empirical Power and Specification of Test Statistics.” Journal of Financial Economics, 41 (1996), 359401.CrossRefGoogle Scholar
Barclay, M. J., and Smith, C. W. Jr. “The Priority Structure of Corporate Liabilities.” Journal of Finance, L., (1995), 899917.CrossRefGoogle Scholar
Berger, P. G., and Ofek, E.. “Diversification's Effect on Firm Value.” Journal of Financial Economics, 37 (1995), 3965.CrossRefGoogle Scholar
Bhagat, S., and Jefferis, R. H.. “Voting Power in the Proxy Process: The Case of Anti-Takeover Charter Amendments.” Journal of Financial Economics, 30 (1991), 193225.CrossRefGoogle Scholar
Bradley, M.; Jarrell, G. A.; and Kim, E. H.. “On the Existence of an Optimal Capital Structure: Theory and Evidence.” Journal of Finance, 39 (1984), 857878.CrossRefGoogle Scholar
Brown, S. J., and Warner, J. B.. “Using Daily Stock Returns: The Case of Event Studies.” Journal of Financial Economics, 14 (1985), 331.CrossRefGoogle Scholar
Chan, L. K. C.; Jegadeesh, N.; and Lakonishok, J.. “Evaluating the Performance of Value versus Glamour Stocks: The Impact of Selection Bias.” Journal of Financial Economics, 38 (1995), 269295.CrossRefGoogle Scholar
Clarke, R. N.SICs as Delineators of Economic Markets.” Journal of Business, 62 (1989), 1731.CrossRefGoogle Scholar
Comment, R., and Jarrell, G. A.. “Corporate Focus and Stock Returns.” Journal of Financial Economics 37 (1995), 6787.CrossRefGoogle Scholar
Cusatis, P. J.; Miles, J. A.; and Woolridge, J. R.. “Restructuring through Spinoffs; The Stock Market Evidence.” Journal of Financial Economics, 33 (1993), 293311.CrossRefGoogle Scholar
Dun and Bradstreet Information Resources. Standard Industrial Classification Manual. (1988).Google Scholar
Eckbo, E.Mergers and the Value of Antitrust Deterrence.” Journal of Finance, 47 (1992), 10051029.CrossRefGoogle Scholar
Fama, E., and French, K.. “The Cross-Section of Expected Stock Returns.” Journal of Finance, 47 (1992), 427465.Google Scholar
Fertuck, L.A Test of Industry Indices Based on SIC Codes.” Journal of Financial and Quantitative Analysis, 10 (1975), 837848.CrossRefGoogle Scholar
Franks, J. R., and Torous, W. N.. “A Comparison of Financial Recontracting in Distressed Exchanges and Chapter 11 Reorganizations.” Journal of Financial Economics, 35 (1994), 349370.CrossRefGoogle Scholar
Freeman, R., and Tse, S.. “An Earnings Prediction Approach to Examining Intercompany Information Transfers.” Journal of Accounting and Economics, 15 (1992), 509523.CrossRefGoogle Scholar
Guenther, D. A., and Rosman, A. J.. “Differences between Compustat and CRSP SIC Codes and Related Effects on Research.” Journal of Accounting and Economics, 18 (1994), 115128.CrossRefGoogle Scholar
Kaplan, S.The Effects of Management Buyouts on Operating Performance and Value.” Journal of Financial Economics, 24 (1989), 217254.CrossRefGoogle Scholar
King, B. F.Market and Industry Factors in Stock Price Behavior.” Journal of Business, 39 (01 1966), 139189.CrossRefGoogle Scholar
Whited, T. M.Debt, Liquidity Constraints, and Corporate Investment: Evidence from Panel Data.” Journal of Finance, 47 (1992), 14251460.CrossRefGoogle Scholar