Scope, Scale, and Concentration: A New Perspective on the 21st-Century Firm

The Evolution of Firm Scope and Measurement Challenges

Recent discussions on corporate concentration have relied on traditional industry classifications that often fail to capture the evolving nature of firm scope and competition. Historically, firm scope has been measured using Compustat segment data, which relies on broad industry classifications and managerial reporting discretion. However, this traditional method falls short in capturing the true breadth of modern firms, particularly as they expand into related product markets rather than diversifying into entirely new industries.

In our recent paper, “Scope, Scale, and Concentration: The 21st-Century Firm,” published in The Journal of Finance, Gerard Hoberg and I introduce a novel methodology to measure firm scope using natural language processing (NLP) techniques, specifically doc2vec. This advanced text analysis method allows us to extract rich textual information from firms’ annual reports, offering a more granular, data-driven approach to measuring firm scope. By analyzing firms’ 10-K filings, we can quantify the industries they truly operate in based on how they describe their businesses, providing a significantly more detailed and accurate measure than conventional business segment data.

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