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Common Analysts: Method for Defining Peer Firms

Published online by Cambridge University Press:  06 July 2020

Markku Kaustia  and
Ville Rantala Open the ORCID record for Ville Rantala [Opens in a new window]
Markku Kaustia*
Affiliation:
Aalto University School of [email protected]
Ville Rantala
Affiliation:
University of Miami Herbert Business [email protected]
*
[email protected] (corresponding author)
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Abstract

We develop a method for defining groups of peer firms on the basis of joint analyst coverage. Besides industry boundaries, analysts’ coverage choices reflect other aspects of firm relatedness such as business model. We find that the analyst-based method produces substantially more homogeneous groups of firms compared to common industry classifications, and has a number of other desirable properties. The paper has two broader implications. First, it demonstrates the advantages of a self-organizing approach to classification, as opposed to a hierarchical system. Second, it illustrates a new positive information production externality generated by the institution of security market analysis.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 5 , August 2021 , pp. 1505 - 1536
Copyright
© The Author(s), 2020. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

We thank anonymous referees, Jan Bartholdy, Jonathan Berk, Thierry Foucault, Guojin Gong, Jarrad Harford (the editor), Gerard Hoberg, Hans Hvide, Timo Korkeamäki, Alexander Ljungqvist, Michelle Lowery, and Gordon Phillips, as well as the seminar participants at the 2014 American Finance Association and at the 2013 American Accounting Association, and the 2013 Nordic Finance Network workshop for comments. Rantala acknowledges financial support from the Finnish Foundation for Advancement of Securities Market.

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