Industry Classification: Review, Hurdles and Methodologies

Abstract

The goal of the paper was to develop a methodology for assigning companies into industries. In the first section we emphasize the importance of industry classification on research and for the practitioners. Review the literature in second section, it seems hard to believe, that industry classification does not affected the results of number of researches. The third section of the paper is devoted to the actual model of industry assignment. The model utilizes the approach of Bernstein - Clearwater - Provost (2003). The relationships between market entities were defined as stock return co-movements, thus our methodology was slightly different. The fourth section is a case study, where we employed the model to re-classify S&P 500 companies into GICS. The concordance between our approach and GICS was only slightly higher than 50%, for both scoring functions.