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

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  • Yim, Andrew
  • Schröder, David

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. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
    3. Jack Glen & Kevin Lee & Ajit Singh, 2003. "Corporate profitability and the dynamics of competition in emerging markets: a time series analysis," Economic Journal, Royal Economic Society, vol. 113(491), pages 465-484, November.
    4. Robert Conroy & Robert Harris, 1987. "Consensus Forecasts of Corporate Earnings: Analysts' Forecasts and Time Series Methods," Management Science, INFORMS, vol. 33(6), pages 725-738, June.
    5. Juan Carlos Bou & Albert Satorra, 2007. "The persistence of abnormal returns at industry and firm levels: Evidence from Spain," Strategic Management Journal, Wiley Blackwell, vol. 28(7), pages 707-722, July.
    6. Collins, Dw, 1976. "Predicting Earnings With Sub-Entity Data - Some Further Evidence," Journal of Accounting Research, Wiley Blackwell, vol. 14(1), pages 163-177.
    7. Albrecht, Ws & Lookabill, Ll & Mckeown, Jc, 1977. "Time-Series Properties Of Annual Earnings," Journal of Accounting Research, Wiley Blackwell, vol. 15(2), pages 226-244.
    8. 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.
    9. 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.
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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.

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    More about this item

    Keywords

    Segment profitability; Earnings predictability; Earnings persistence; Aggregation; Diversity; Industry membership;
    All these keywords.

    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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