What's My Line? A Comparison of Industry Classification Schemes for Capital Market Research
38 Pages Posted: 31 Dec 2002
Date Written: May 19, 2003
This study compares four broadly available industry classification schemes in a variety of applications common to capital market research. SIC codes have been available since 1939, but are being replaced by NAICS codes. The Global Industry Classifications Standard (GICS)SM system, jointly developed by S&P and MSCI, is gaining popularity among financial practitioners, while the Fama and French (1997; FF)) algorithm is devised by academics. Our results show that GICS classifications are significantly better at explaining stock return co-movements, as well as cross-sectional variations in valuation-multiples, forecasted and realized growth rates, R&D expenditures, and various key financial ratios. The GICS advantage is consistent from year-to-year and is most pronounced among large firms. The other three methods differ little from each other in most applications.
JEL Classification: M41, G12, G14
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