Review of Quantitative Finance and Accounting

, Volume 40, Issue 1, pp 15–39 | Cite as

The role of industry classification in estimating discretionary accruals

  • Karel Hrazdil
  • Thomas Scott
Original Research


This study compares the properties of the Global Industry Classification Standard (GICS) with three alternatives: Standard Industrial Classification, North American Industry Classification System, and Fama–French classification. First, we demonstrate that GICS results in more reliable industry groupings for financial analysis and research; in particular, we find that estimations of performance-adjusted discretionary accruals (PADA) based on GICS significantly outperform estimates derived using each of the three alternative classifications systems in capturing discretionary accruals. Second, we show that the difference between GICS and the other systems can provide significantly different results, and hence different inferences, in empirical studies that rely on industry classification. Specifically, we revisit findings by Teoh et al. (J Financ 53[6]:1935–1970, 1998a) and assess the conclusion that initial public offering (IPO) issuers with high abnormal accruals during the IPO year experience subsequent poorer long-term stock performance than issuers with low discretionary accruals do. We find that this result disappears when PADA estimates are based on GICS. Our results call for serious consideration of using GICS classifications in research, either in the primary analysis or as a necessary corroboration.


Discretionary accruals Industry classification GICS IPO 

JEL Classification

G12 G14 



We thank the Editor and an anonymous referee for valuable comments that have been of great help in improving the quality of this report. We also acknowledge helpful comments from J. Callen, I. Mathur, K. Lo, P. Clarkson, S. Fortain, D. Tsang, D. Chung, P. Hopkins, and workshop participants at Simon Fraser University, McGill University, the 2010 Canadian Academic Accounting Association Conference, the 2010 American Accounting Association Conference, and the 2011 European Accounting Conference. We acknowledge financial support from the Social Sciences and Humanities Research Council of Canada. Gloria Kim provided excellent research assistance. The GICS system (GIGS History) was licensed from S&P for the period from March 1, 2008, to March 1, 2009. All other data were obtained from publicly available sources cited in the study. Any errors are ours.


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Copyright information

© Springer Science+Business Media, LLC 2011

Authors and Affiliations

  1. 1.Beedie School of BusinessSimon Fraser UniversityBurnabyCanada
  2. 2.School of BusinessUniversity of AlbertaEdmontonCanada

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