Industry Window Dressing

Huaizhi Chen, Lauren Cohen and Dong Lou

The Review of Financial Studies, 2016, vol. 29, issue 12, 3354-3393

Abstract: We explore a new mechanism by which investors take correlated shortcuts and present evidence that managers—using sales management—take advantage of these shortcuts. Specifically, we exploit a regulatory provision wherein a firm's primary industry is determined by the highest sales segment. Exploiting this regulation, we provide evidence that investors classify operationally nearly identical firms as starkly different depending on their placement around this sales cutoff. Moreover, managers appear to exploit this by manipulating sales to be just over the cutoff in favorable industries. Further evidence suggests that managers engage in activities to realize large, tangible benefits from this opportunistic action.Received July 28, 2014; accepted February 8, 2016 by Editor Andrew Karolyi.

JEL-codes: G02 G10 G32 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (11)

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