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Industry Window Dressing

Author

Listed:
  • Huaizhi Chen
  • Lauren Cohen
  • Dong Lou

Abstract

We explore a new mechanism by which investors take correlated shortcuts and present evidence that managers—using sales management—take advantage of these shortcuts. Specifically, we exploit a regulatory provision wherein a firm's primary industry is determined by the highest sales segment. Exploiting this regulation, we provide evidence that investors classify operationally nearly identical firms as starkly different depending on their placement around this sales cutoff. Moreover, managers appear to exploit this by manipulating sales to be just over the cutoff in favorable industries. Further evidence suggests that managers engage in activities to realize large, tangible benefits from this opportunistic action.Received July 28, 2014; accepted February 8, 2016 by Editor Andrew Karolyi.

Suggested Citation

  • Huaizhi Chen & Lauren Cohen & Dong Lou, 2016. "Industry Window Dressing," The Review of Financial Studies, Society for Financial Studies, vol. 29(12), pages 3354-3393.
    • Handle: RePEc:oup:rfinst:v:29:y:2016:i:12:p:3354-3393.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhw020
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    Citations

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    Cited by:

    1. Bo Becker & Victoria Ivashina, 2023. "Disruption and Credit Markets," Journal of Finance, American Finance Association, vol. 78(1), pages 105-139, February.
    2. Altanlar, Ali & Amini, Shima & Holmes, Phil & Eshraghi, Arman, 2023. "Opportunism, overconfidence and irrationality: A puzzling triad," International Review of Financial Analysis, Elsevier, vol. 88(C).
    3. Xiao, Zhijie & Xu, Lan, 2019. "What do mean impacts miss? Distributional effects of corporate diversification," Journal of Econometrics, Elsevier, vol. 213(1), pages 92-120.
    4. Gong, Di & Huizinga, Harry & Li, Tianshi & Zhu, Jigao, 2023. "Goodhart’s law in China: Bank branching regulation and window dressing," Journal of Empirical Finance, Elsevier, vol. 74(C).
    5. Swasti Gupta‐Mukherjee & Ankur Pareek, 2020. "Limited attention and portfolio choice: The impact of attention allocation on mutual fund performance," Financial Management, Financial Management Association International, vol. 49(4), pages 1083-1125, December.
    6. Schlag, Christian & Zeng, Kailin, 2019. "Horizontal industry relationships and return predictability," Journal of Empirical Finance, Elsevier, vol. 53(C), pages 310-330.
    7. Schlag, Christian & Zeng, Kailin, 2019. "Horizontal industry relationships and return predictability," SAFE Working Paper Series 256, Leibniz Institute for Financial Research SAFE.
    8. Le, Trinh Hue & Oliver, Barry & Tan, Kelvin Jui Keng, 2022. "Nowhere to hide: Response of corporate restructuring activities to mandatory segment disclosure," Journal of Corporate Finance, Elsevier, vol. 76(C).
    9. David Schröder & Andrew Yim, 2018. "Industry Effects in Firm and Segment Profitability Forecasting," Contemporary Accounting Research, John Wiley & Sons, vol. 35(4), pages 2106-2130, December.
    10. Bruno Pellegrino, 2023. "Product Differentiation and Oligopoly: A Network Approach," CESifo Working Paper Series 10244, CESifo.

    More about this item

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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