Are NAICS Industries More Homogeneous Than SICS Industries?

Document Type

Article

Publication Date

9-1-2009

Publication Title

Academy of Accounting and Financial Studies Journal

ISSN

1096-3685

Abstract

This study compares the homogeneity of industry members when classified under the Standard Industry Classification System (SICS) and when classified under the North American Industry Classification System (NAICS). Homogeneity is measured as (1) correlations of operating expense changes and of revenue changes, and (2) the variability of inventory, debt, and depreciation policies among member firms. Firms are tracked from SICS-defined industries to NAICS-defined industries and three comparisons are made. First, NAICS CLEANED industries, whose SICS memberships have been weeded to produce a subset of fewer firms under the NAICS codes, are more homogenous than the original SICS industries. Second, NAICS INTACT industries, all of whose members have the same SICS and NAICS codes, are more homogenous than the SICS non-INTACT industries, whose member-firms have different NAICS codes. Lastly, NAICS CONSOLIDATED industries, whose memberships are formed from a wide variety of prior SICS industries, are not as homogenous as the prior SICS classifications. Our results help identify which types of NAICS-defined industries provide more homogenous groups for such inter-firm comparisons as ratio analysis and benchmarking.

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