Industry window dressing

Chen, Huaizhi, Cohen, Lauren and Lou, Dong ORCID: 0000-0002-5623-4338 (2016) Industry window dressing. Review of Financial Studies, 29 (12). 3354 - 3393. ISSN 0893-9454

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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.

Item Type:	Article
Official URL:	https://academic.oup.com/rfs
Additional Information:	© 2016 The Authors
Divisions:	Finance
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HG Finance
JEL classification:	G - Financial Economics > G0 - General > G00 - General G - Financial Economics > G1 - General Financial Markets > G10 - General G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
Date Deposited:	24 Mar 2017 12:51
Last Modified:	31 Oct 2024 20:18
URI:	http://eprints.lse.ac.uk/id/eprint/70650

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