Industry Effects in Firm and Segment Profitability Forecasting
34 Pages Posted: 3 Jun 2012 Last revised: 15 Jun 2020
Date Written: August 8, 2017
Academics and practitioners have long recognized the importance of a firm’s industry membership in explaining its financial performance. Yet, contrary to conventional wisdom, recent research shows that industry-specific profitability forecasting models are not better than economy-wide models. The objective of this paper is to further explore this result and to provide insights into when and why industry-specific profitability forecasting models are useful. We show that industry-specific forecasts are significantly more accurate in predicting profitability for single-segment firms and, to some extent, for business segments. For multiple-segment firms, the aggregation of segment-level data for external reporting of firm-level financials obliterates the industry effects of their segments.
Keywords: Industry membership, Profitability forecasting, Diversification, Disaggregation, Segment disclosure
JEL Classification: L25, G17, M21, M41, C53
Suggested Citation: Suggested Citation