IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/39190.html
   My bibliography  Save this paper

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

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/39190/1/MPRA_paper_39190.pdf
    File Function: original version
    Download Restriction: no
    File URL: https://mpra.ub.uni-muenchen.de/49025/1/MPRA_paper_49025.pdf
    File Function: revised version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Collins, Dw, 1976. "Predicting Earnings With Sub-Entity Data - Some Further Evidence," Journal of Accounting Research, Wiley Blackwell, vol. 14(1), pages 163-177.
    2. 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.
    3. 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.
    4. 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.
    5. 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.
    6. 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.
    7. 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.
    8. 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.
    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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Goddard, John & Tavakoli, Manouche & Wilson, John O.S., 2009. "Sources of variation in firm profitability and growth," Journal of Business Research, Elsevier, vol. 62(4), pages 495-508, April.
    2. Michael Neel & Irfan Safdar, 2024. "Financial statement relevance, representational faithfulness, and comparability," Review of Quantitative Finance and Accounting, Springer, vol. 62(1), pages 309-339, January.
    3. Nyanine Chuele Fonou-Dombeu & Josue Mbonigaba & Odunayo Magret Olarewaju & Bomi Cyril Nomlala, 2022. "Earnings quality measures and stock return volatility in South Africa," Future Business Journal, Springer, vol. 8(1), pages 1-15, December.
    4. Canarella, Giorgio & Miller, Stephen M. & Nourayi, Mahmoud M., 2013. "Firm profitability: Mean-reverting or random-walk behavior?," Journal of Economics and Business, Elsevier, vol. 66(C), pages 76-97.
    5. Ramzi Benkraiem & Safa Gaaya & Faten Lakhal, 2020. "Cross-Country Evidence on Earnings Quality and Corporate Tax Avoidance: The Moderating Role of Legal Institutions," Economics Bulletin, AccessEcon, vol. 40(2), pages 1714-1726:.
    6. Yusuke Takasu & Makoto Nakano, 2012. "What Do Smoothed Earnings Tell Us about the Future?," The Japanese Accounting Review, Research Institute for Economics & Business Administration, Kobe University, vol. 2, pages 1-32, December.
    7. Kousenidis, Dimitrios V. & Ladas, Anestis C. & Negakis, Christos I., 2013. "The effects of the European debt crisis on earnings quality," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 351-362.
    8. Silhan, Peter A., 2014. "Income smoothing from a Census X-12 perspective," Advances in accounting, Elsevier, vol. 30(1), pages 106-115.
    9. Persakis, Anthony & Iatridis, George Emmanuel, 2015. "Earnings quality under financial crisis: A global empirical investigation," Journal of Multinational Financial Management, Elsevier, vol. 30(C), pages 1-35.
    10. Florian Eugster & Alexander F. Wagner, 2021. "Earning investor trust: The role of past earnings management," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(1-2), pages 269-307, January.
    11. Curtis Farnsel, 2023. "Do Investors Perceive the Link Between Equity Method Earnings and Future Earnings? The Role of Supplemental Disclosures," Abacus, Accounting Foundation, University of Sydney, vol. 59(4), pages 954-982, December.
    12. JS Armstrong, 2004. "Relative Accuracy of Judgmental and Extrapolative Methods in Forecasting Annual Earnings," General Economics and Teaching 0412007, University Library of Munich, Germany.
    13. Hernan Etiennot & Roberto Vassolo & Francisco Diaz Hermelo & Anita McGahan, 2019. "How do industry and country impact firm performance? A national and supranational analysis," Review of Managerial Science, Springer, vol. 13(4), pages 791-821, August.
    14. Robert M. Bushman & Regina Wittenberg‐Moerman, 2012. "The Role of Bank Reputation in “Certifying” Future Performance Implications of Borrowers’ Accounting Numbers," Journal of Accounting Research, Wiley Blackwell, vol. 50(4), pages 883-930, September.
    15. Troy Pollard, 2016. "Sneaking in the back door? An evaluation of reverse mergers and IPOs," Review of Quantitative Finance and Accounting, Springer, vol. 47(2), pages 305-341, August.
    16. Antonelli Cristiano & Crespi, Francesco & Scellato, Giuseppe, 2013. "Path Dependent Patterns of Persistence in Productivity Growth," Department of Economics and Statistics Cognetti de Martiis LEI & BRICK - Laboratory of Economics of Innovation "Franco Momigliano", Bureau of Research in Innovation, Complexity and Knowledge, Collegio 201310, University of Turin.
    17. Dichev, Ilia D. & Graham, John R. & Harvey, Campbell R. & Rajgopal, Shiva, 2013. "Earnings quality: Evidence from the field," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 1-33.
    18. Joonhyun Kim & Jinsoo Kim, 2018. "Corporate Sustainability Management and Its Market Benefits," Sustainability, MDPI, vol. 10(5), pages 1-14, May.
    19. Øystein Gjerde & Kjell Knivsflå & Frode Sættem, 2010. "Evidence on competitive advantage and superior stock market performance," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 31(4), pages 277-301.
    20. Wu, Wei-Shao & Fok, Robert C.W. & Chang, Yuanchen & Chen, Chao-Jung, 2022. "Credit default swaps and corporate performance smoothing," Journal of Corporate Finance, Elsevier, vol. 75(C).

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:39190. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.