Measuring Inter-Industry Relatedness: SIC Distances versus the Survivor Principle

43 Pages Posted: 31 Jul 2008

See all articles by Lasse B. Lien

Lasse B. Lien

Norwegian School of Economics (NHH)

Peter G. Klein

Baylor University - Hankamer School of Business; Norwegian School of Economics (NHH) - Department of Strategy and Management; Ludwig von Mises Institute

Date Written: May 25, 2008

Abstract

The conventional approach to measuring inter-industry relatedness uses the SIC system to capture the "distance" between industries. While relatedness measures based on SIC codes (or equivalent classifications) are readily available and easy to compute, they do not screen effectively for the conditions under which related diversification creates value. This paper constructs an alternative, survivor-based measure of inter-industry relatedness and compares it to similar measures based on distances between SIC codes. We find that survivor-based measures consistently outperform SIC-based measures in predicting firms' decisions to enter new markets, even when herding tendencies and motives related to mutual forbearance are taken into account.

Keywords: diversification, relatedness, survivor principle, entry, exit, herding, mutual forbearance

JEL Classification: L25, L11

Suggested Citation

Lien, Lasse B. and Klein, Peter G., Measuring Inter-Industry Relatedness: SIC Distances versus the Survivor Principle (May 25, 2008). Available at SSRN: https://ssrn.com/abstract=1139522 or http://dx.doi.org/10.2139/ssrn.1139522

Lasse B. Lien

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, 5045
Norway
+47 55959726 (Phone)

Peter G. Klein (Contact Author)

Baylor University - Hankamer School of Business ( email )

Waco, TX 76798
United States
254-710-4903 (Phone)

Norwegian School of Economics (NHH) - Department of Strategy and Management ( email )

Breiviksveien 40
N-5045 Bergen
Norway

Ludwig von Mises Institute ( email )

Auburn, AL
United States

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