Industry Effects in Firm and Segment Profitability Forecasting

Academics and practitioners have long recognized the importance of a firm’s industry membership in explaining its financial performance. Yet, contrary to conventional wisdom, recent research shows that industry-specific profitability forecasting models are not better than economy-wide models. The objective of this paper is to further explore this result and to provide insights into when and why industry-specific profitability forecasting models are useful. We show that industry-specific forecasts are significantly more accurate in predicting profitability for single-segment firms and, to some extent, for business segments. For multiple-segment firms, the aggregation of segment-level data for external reporting of firm-level financials obliterates the industry effects of their segments.