Industry Effects in Firm and Segment Profitability Forecasting

34 Pages Posted: 3 Jun 2012 Last revised: 15 Jun 2020

See all articles by David Schröder

David Schröder

University of London - Birkbeck College

Andrew Yim

Cass Business School, City, University of London

Date Written: August 8, 2017

Abstract

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

Schroeder, David and Yim, Andrew, Industry Effects in Firm and Segment Profitability Forecasting (August 8, 2017). Contemporary Accounting Research, 35: 2106-2130. doi:10.1111/1911-3846.12361, Available at SSRN: https://ssrn.com/abstract=2073336 or http://dx.doi.org/10.2139/ssrn.2073336

David Schroeder

University of London - Birkbeck College ( email )

Malet Street
London, WC1E 7HX
United Kingdom

Andrew Yim (Contact Author)

Cass Business School, City, University of London ( email )

Faculty of Finance
106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

HOME PAGE: http://www.cass.city.ac.uk/faculties-and-research/experts/andrew-yim

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