Industry Window Dressing
- Send correspondence to Dong Lou, London School of Economics, Room CON 2.16, Houghton St., London WC2A 2AE, U.K.; telephone: +44 (0) 207 1075360. E-mail: d.lou{at}lse.ac.uk.
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
- © The Author 2016. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com.
