Disaggregated earnings and prediction of future profitability: evidence from industrial groups in Japan

Purpose This paper seeks to examine the predictive ability of disaggregated earnings in forecasting future profitability conditional on keiretsu affiliation in the context of Japan. Design/methodology/approach Industry‐adjusted future profitability measure is regressed on current profitability measures and on interaction terms of keiretsu affiliation and profitability measures. Out‐of‐sample forecasting test is conducted by regressing future profitability on current profitability measures for keiretsu ‐affiliated and independent firms. Findings Disaggregated earnings improve out‐of‐sampling forecasting for firms not affiliated with keiretsu networks. For the keiretsu ‐affiliated firms industry adjustments actually diminish the out‐of‐sample forecasting accuracy. Research limitations/implications The boundary between keiretsu ‐affiliated and independent firms is not so obvious. Originality/value Examining industry competitiveness in Japan using accounting information is a significant contribution to the literature.