Analysts’ Choice of Peer Companies

Abstract:     
This is the first large-scale study to examine the peer companies used by sell-side equity analysts in their research reports. Using a unique hand-collected data set, we investigate the relation between peer valuation and peer choice by analysts. Controlling for numerous factors, we find that analysts on average select peer companies with high valuations, consistent with analysts choosing peers strategically. We further find that this effect varies systematically with analysts’ ability, analysts’ incentives, and expected firm growth. We also find partial support for the idea that the selection of peers with high valuations helps explain the widely documented optimistic bias in stock recommendations and target prices.

Number of Pages in PDF File: 45

Keywords: Analysts, peer selection, valuation, stock recommendations, target prices, bias, incentives

JEL Classification: G30, G31, G32, G34, M41

working papers series