Industry Classification Providers as Information Intermediaries

Abstract

External users of financial reporting often rely on industry classification providers to lower information processing costs. I study the economic consequences of capital market participants relying on the Global Industrial Classification Standard (GICS) as an information intermediary. I find that firms with higher quality classifications exhibit stronger liquidity, a lower cost of capital, and higher investment. When exploiting staggered GICS reclassifications as a shock to classification quality, I find relative reductions in cost of capital and increases in investment for firms with lower pre-treatment classification quality. In sample-splitting tests, I find larger effects when sell-side analysts and buy-side investors are more likely to rely on GICS. Finally, a placebo test using the Standard Industrial Classification, which is less relied upon by market participants, shows no link with capital market or investment outcomes. Collectively, these findings demonstrate the significant capital market and real effects facilitated by industry classification providers.

Keywords: Industry Classification, Information Processing, Liquidity, Real Effects, Information Spillover Effects, Peer Effects

JEL Classification: D82, G14, L15, L16, L22