Does Industry-Level Analysis Improve Profitability and Growth Forecasts?

47 Pages Posted: 14 Sep 2004

See all articles by Patricia M. Fairfield

Patricia M. Fairfield

Georgetown University - Department of Accounting and Business Law

Sundaresh Ramnath

University of Miami - Department of Accounting

Teri Lombardi Yohn

Emory University Goizueta Business School

Date Written: May 2005

Abstract

A long history of economic theory suggests that industry membership plays an important role in explaining a firm's financial performance. In this paper we investigate the usefulness of industry benchmarks and industry level analysis for predicting a firm's future profitability and growth. Specifically we investigate whether incorporating the industry performance metric provides incremental information over the firm specific metric for explaining performance one-year-ahead. We also investigate the usefulness of performing industry level analysis relative to an analysis of all firms pooled across the economy.

We find little or no incremental explanatory power from incorporating industry information for predicting future profitability, defined either as return on equity or return on net operating assets. Nor do we find industry information incrementally informative for predicting growth in net operating assets. We do, however, find significant improvement from incorporating industry information for predicting growth in sales. These general results hold for one-, three-, and five-year windows, and are robust to alternative industry classification schemes.

Keywords: financial statement analysis, industry membership, earnings forecasting

JEL Classification: M41, G12

Suggested Citation

Fairfield, Patricia M. and Ramnath, Sundaresh and Yohn, Teri Lombardi, Does Industry-Level Analysis Improve Profitability and Growth Forecasts? (May 2005). Available at SSRN: https://ssrn.com/abstract=589361 or http://dx.doi.org/10.2139/ssrn.589361

Patricia M. Fairfield

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States
202-687-4583 (Phone)
202-687-4031 (Fax)

Sundaresh Ramnath (Contact Author)

University of Miami - Department of Accounting ( email )

Coral Gables, FL 33146-6531
United States
305-284-6668 (Phone)

Teri Lombardi Yohn

Emory University Goizueta Business School ( email )

201 Dowman Drive
Atlanta, GA 30322
United States

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