The North American Industry Classification System and Its Implications for Accounting Research

Abstract

Industry classification is an important component of the methodological infrastructure of accounting research. Researchers have generally used the Standard Industrial Classification (SIC) system for assigning firms to industries. In 1999, the major statistical agencies of Canada, Mexico, and the United States began implementing NAICS, the North American Industry Classification System. The new scheme radically changes industry classification by introducing production as the basis for grouping firms, creating 358 new industries, extensively rearranging SIC categories, and establishing uniformity across all NAFTA nations. We examine the implications of the change for accounting research. We assess NAICS' effectiveness in forming industry groups. Following Guenther and Rosman (1994), we use financial ratio variances to measure intra-industry homogeneity, and find NAICS offers some improvement over the SIC system in defining manufacturing, transportation, and service industries. We also evaluate how NAICS can impact empirical research by reproducing part of Lang and Lundholm's (1996) study of information-transfer and industry effects. They focus on whether industry conditions or the level of competition is the main source of uncertainty resolved by earnings announcements. Across all levels of aggregation, inferences are similar using either SIC or NAICS. However, for Services, NAICS definitions identify a number of cases of resolution of competition-uncertainty, whereas SIC definitions do not. We also find that the regression coefficients in Lang and Lundholm's model show smaller intra-industry dispersion for NAICS, relative to SIC, definitions. This suggests the NAICS definitions lead to greater industry homogeneity. Overall, we conclude that researchers may realize some improvements in using NAICS rather than SIC, particularly in studies that use industries reconfigured by NAICS. Kewyords: Standard Industrial Classification, North American Industry Classification System, final ratios, intra-industry