Using accounting measures of (in)tangibility for organizational classifications

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

doi:10.3934/QFE.2021015

Quantitative Finance and Economics

2021, Volume 5, Issue 2: 325-351. doi: 10.3934/QFE.2021015

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Research article

Using accounting measures of (in)tangibility for organizational classifications

1.
Lisboa School of Economics & Management, Universidade de Lisboa (University of Lisbon), Portugal
2.
Department of Accounting & Finance, University of Strathclyde Business School, Glasgow, Scotland

Received: 03 March 2021 Accepted: 09 May 2021 Published: 13 May 2021
JEL Codes: B4, E2, L00

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.
- industry classification,
- intangibility,
- capital structure,
- homogeneity assumption,
- empirical evidence,
- us data,
- panel data analysis
Citation: Tiago Cardão-Pito, Julia A Smith, João da Silva Ferreira. Using accounting measures of (in)tangibility for organizational classifications[J]. Quantitative Finance and Economics, 2021, 5(2): 325-351. doi: 10.3934/QFE.2021015

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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.

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