Using accounting measures of (in)tangibility for organizational classifications

Tiago Cardão-Pito,Julia A Smith,João da Silva Ferreira

doi:10.3934/qfe.2021015

Tiago Cardão-Pito, Julia A Smith + Show 1 more

Open Access

https://doi.org/10.3934/qfe.2021015

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Abstract

<abstract> We present an empirical test of a new measure to classify organizations according to the tangibility of product (output) flows delivered to customers. Our measure exhibits the empirical consequences of using standard industrial classifications to assume that firms within the same industry either share identical properties or sell homogeneous products. To illustrate the misleading findings that can result from these assumptions, we investigate whether prior literature on capital structure provides a sensible interpretation of organizational behavior, based as it often is on an assumption that all firms within a given industrial classification sell durable goods. In contrast to the product-market literature based upon the trade-off theory of capital structure, that would predict that firms selling physical goods will have proportionately less debt, in fact, when firms within industries are classified using our measure, we find to the contrary. Our intention is not to displace existing systems of industry classification but is, rather, to highlight the dangers of drawing conclusions from assuming homogeneity amongst firms which are formally registered within the same industry. </abstract>

Highlights

Researchers tend to categorize firms as being related by the process of producing and selling a specific goods and/or service
We find that those firms with sample Industry Code (SIC) codes between 3400 and 4000, that appear in the lower Level of operating intangibility (LOI) quintiles, corresponding to the most physical-good intensive firms, are in the minority
The remaining 1,499 (=65%) firms are classified into the higher LOI quintiles (3–5), which correspond to the semi-intangible and intangible product intensive firms

Summary

Introduction

Researchers tend to categorize firms as being related by the process of producing and selling a specific goods and/or service. If we use a simple binary variable to identify a firm’s characteristics we assume that firms registered in that industry either share similar properties or sell homogeneous products (Draper, 1975; Evangelista et al, 2015; Scellato, 2007). An alternative stream of research identifies the intangible elements necessary for economic production as intangible assets or knowledge (Hunter et al, 2012; Penman, 2009; Marrocu et al, 2012; Mathews, 2003; Wines & Ferguson, 1993). The production of intangible and semi-intangible products may require properties that are distinguishable from the production of physical goods in an industry, classified according to the tangibility of their product (output) flows The production of intangible and semi-intangible products may require properties that are distinguishable from the production of physical goods in an industry, classified according to the tangibility of their product (output) flows (e.g. Penman, 2009; Shostack, 1977; Zeithmal et al, 1985; Tether et al, 2001; Miles and Tether, 2001; Tollington and Spinelli, 2012; Santamarıa et al, 2012)

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