The Trouble with Approximating Industry Concentration from Compustat
33 Pages Posted: 4 Dec 2016 Last revised: 14 Nov 2017
Date Written: May 19, 2017
Using Compustat to measure industry concentration in the U.S. is problematic. Popular approximations of the Herfindahl Index based on this data set have a vanishingly low correlation with the more comprehensive Census measure. As a result, major variables of interest in corporate finance show markedly different correlations with these indicators, which can lead to a breakdown of regression results. This confirms findings of an earlier article that has been ignored by recent empirical studies. I show that Census concentration ratios are excellent measures and provide a newly compiled data set based on all concentration data ever produced by the Department of Commerce – eliminating the need to use the convenient but flawed Compustat files.
Keywords: Industry concentration, Herfindahl-Hirschman Index, concentration ratios, Compustat, Economic Census
JEL Classification: C81, G00, L11
Suggested Citation: Suggested Citation