Industry window dressing

Huaizhi Chen, Lauren Cohen and Dong Lou

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

JEL-codes: G00 G10 G32 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2016-12-01
New Economics Papers: this item is included in nep-bec
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Published in Review of Financial Studies, 1, December, 2016, 29(12), pp. 3354 - 3393. ISSN: 0893-9454

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:70650

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