What's My Line? A Comparison of Industry Classification Schemes for Capital Market Research

What's My Line? A Comparison of Industry Classification Schemes for Capital Market Research ABSTRACT This study compares four broadly available industry classification schemes in a variety of applications common to capital market research. Standard Industrial Classification (SIC) codes have been available since 1939 but are being replaced by North American Industry Classification System (NAICS) codes. The Global Industry Classifications Standard (GICS)SM system, jointly developed by Standard & Poor's and Morgan Stanley Capital International (MSCI), is popular among financial practitioners, whereas the Fama and French (1997) algorithm is used primarily by academics. Our results show that GICS classifications are significantly better at explaining stock return comovements, as well as cross‐sectional variations in valuation multiples, forecasted and realized growth rates, research and development expenditures, and various key financial ratios. The GICS advantage is consistent from year to year and is most pronounced among large firms. The other three methods differ little from each other in most applications. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting Research Wiley

What's My Line? A Comparison of Industry Classification Schemes for Capital Market Research

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Publisher
Wiley
Copyright
Copyright © 2003 Wiley Subscription Services, Inc., A Wiley Company
ISSN
0021-8456
eISSN
1475-679X
DOI
10.1046/j.1475-679X.2003.00122.x
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT This study compares four broadly available industry classification schemes in a variety of applications common to capital market research. Standard Industrial Classification (SIC) codes have been available since 1939 but are being replaced by North American Industry Classification System (NAICS) codes. The Global Industry Classifications Standard (GICS)SM system, jointly developed by Standard & Poor's and Morgan Stanley Capital International (MSCI), is popular among financial practitioners, whereas the Fama and French (1997) algorithm is used primarily by academics. Our results show that GICS classifications are significantly better at explaining stock return comovements, as well as cross‐sectional variations in valuation multiples, forecasted and realized growth rates, research and development expenditures, and various key financial ratios. The GICS advantage is consistent from year to year and is most pronounced among large firms. The other three methods differ little from each other in most applications.

Journal

Journal of Accounting ResearchWiley

Published: Dec 1, 2003

References

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