Using Industry Classification Codes to Sample High-Technology Firms: Analysis and Recommendations

Abstract

This study develops procedures for selecting and partitioning samples of high-technology firms for North American Industry Classification System (NAICS), Global Industry Classification System (GICS), and Standardized Industry Classification (SIC) codes. This study also assesses whether NAICS or GICS codes offer improvement over SIC codes as a methodology to identify high-technology firms, including Internet firms. SIC codes are predominantly used in accounting, information systems, business, and economics studies to select high-technology firms for analyses. However, recent studies such as Clarke (1989), Fan and Lang (2000), Ramnath (2001), and Bhojraj, Lee, and Oler (2003) have called into question the accuracy of using SIC codes for firm classification. Our study constructs a benchmark industry classification, constructed from analyses of detailed descriptions of firms' businesses from Description of Business and footnote disclosures (required in all 10-Ks and registration statements). Based on a comparison with our benchmark industry classification, we developed combinations of codes from each system that we recommend be used to construct samples of high-technology firms or specifically targeted high-technology industries. We conclude from our analyses that GICS codes offer improvement over SIC and NAICS codes for targeting technology firms.