Do Industry-Level Analyses Improve Forecasts of Financial Performance?

Prior research documents mean reversion in firm profitability and growth under the implicit assumption that profitability and growth of all firms revert to a common benchmark at the same rate. However, a large body of academic research suggests that there are systematic interindustry differences (e.g., industry barriers to entry) that differentially affect firm performance based on industry membership. We evaluate the relative forecast accuracy of mean reverting models at the industry and economywide levels and find that industry-specific models are generally more accurate in predicting firm growth but not profitability.