Industry Window Dressing

78 Pages Posted: 6 Apr 2016  

Huaizhi Chen

Harvard Business School - Finance Unit

Lauren Cohen

Harvard Business School; National Bureau of Economic Research (NBER)

Dong Lou

London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR)

Date Written: February 4, 2016

Abstract

We explore a new mechanism by which investors take correlated shortcuts, and present evidence that managers undertake actions – in the form of sales management – to take advantage of these shortcuts. Specifically, we exploit a regulatory provision wherein a firm’s primary industry is determined by the highest sales segment. Exploiting this regulation, we provide evidence that investors classify operationally nearly identical firms vastly differently depending on their placement around this sales cut-off. Moreover, managers appear to exploit this by manipulating sales to be just over the cutoff in favorable industries. Further evidence suggests that managers then engage in activities to realize large, tangible benefits from this opportunistic action.

Keywords: Industry window dressing, opportunistic management, discontinuity, favorable industries

JEL Classification: G02, G10, G32

Suggested Citation

Chen, Huaizhi and Cohen, Lauren and Lou, Dong, Industry Window Dressing (February 4, 2016). Available at SSRN: https://ssrn.com/abstract=2758785 or http://dx.doi.org/10.2139/ssrn.2758785

Huaizhi Chen

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States

Lauren Cohen (Contact Author)

Harvard Business School ( email )

Rock Center 321
Soldiers Field
Boston, MA 02163
United States

HOME PAGE: http://www.people.hbs.edu/lcohen

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Dong Lou

London School of Economics & Political Science (LSE) ( email )

Department of Finance
Houghton Street
London, WC2A 2AE
United Kingdom
+44 (0)207 1075360 (Phone)

HOME PAGE: http://personal.lse.ac.uk/loud/

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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