The Impact of Industry Classifications on Financial Research

THE CHARLES A. DICE CENTER FOR RESEARCH IN FINANCIAL ECONOMICS

55 Pages Posted: 4 Nov 1996  

Kathleen M. Kahle

University of Arizona - Department of Finance

Ralph A. Walkling

Drexel University - Lebow College of Business

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Abstract

Although industrial classifications are an important part of financial research, few researchers explicitly recognize the data base they use in classifying industrial structure. There are substantial differences, however, in primary SIC codes for firms on Compustat and CRSP. Over 36% of the classifications disagree at the two-digit level and nearly 80% disagree at the four-digit level. Thus, research results and significance levels based on industry comparisons could differ depending on the source of SIC codes, irrespective of the underlying economics of the problem being analyzed. This research analyzes the impact of industrial classification on financial research. Using approximately 10,000 firms jointly covered by Compustat and CRSP, we simulate a typical research experiment. Specifically, we: 1) examine the extent of agreement between commonly used industrial classifications, 2) examine how SIC codes change over time, and 3) test the specification and power of alternate industrial classifications in typical financial research. Our results document dramatic differences in industrial classifications and analyze the impact of these differences upon statistical inference in finance.

JEL Classification: G15

Suggested Citation

Kahle, Kathleen M. and Walkling, Ralph A., The Impact of Industry Classifications on Financial Research. THE CHARLES A. DICE CENTER FOR RESEARCH IN FINANCIAL ECONOMICS. Available at SSRN: https://ssrn.com/abstract=40169 or http://dx.doi.org/10.2139/ssrn.40169

Kathleen M. Kahle (Contact Author)

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-621-7489 (Phone)

Ralph August Walkling

Drexel University - Lebow College of Business ( email )

LeBow College of Business
Philadelphia, PA 19104
United States
(215) 895-4920 (Phone)
(215) 895-6119 (Fax)

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