Analysts’ Industry Expertise

55 Pages Posted: 17 Mar 2009 Last revised: 14 Nov 2013

Ohad Kadan

Washington University in St. Louis - John M. Olin Business School

Leonardo Madureira

Case Western Reserve University - Weatherhead School of Management

Rong Wang

Singapore Management University; Singapore Management University - Lee Kong Chian School of Business

Tzachi Zach

Ohio State University (OSU) - Fisher College of Business

Date Written: July 15, 2011

Abstract

Industry expertise is an important aspect of sell-side research. We explore this aspect using a novel dataset of industry recommendations, which are often issued by strategy analysts. We study sell-side analysts’ ability to rank industries relative to each other (across-industry expertise), and how it relates to analysts’ ability to rank firms in a particular industry (within-industry expertise). We find that analysts express more optimism towards industries with high levels of investments, past profitability, and past returns. Analysts exhibit across-industry expertise, as portfolios based on industry recommendations generate abnormal returns over both short and long horizons, beyond what would be explained by industry momentum. Additionally, industry recommendations contain information which is orthogonal to the information revealed in firm recommendations, and more so for brokers who benchmark their firm recommendations to industry peers. Consequently, the investment value of sell-side analysts’ recommendations is enhanced when both dimensions of industry expertise are utilized by considering industry and firm recommendations in combination.

Keywords: Industry recommendation, Analysts, Market Efficiency

JEL Classification: G12, G14, G29

Suggested Citation

Kadan, Ohad and Madureira, Leonardo and Wang, Rong and Zach, Tzachi, Analysts’ Industry Expertise (July 15, 2011). AFA 2010 Atlanta Meetings Paper; AAA 2010 Financial Accounting and Reporting Section (FARS) Paper. Available at SSRN: https://ssrn.com/abstract=1361620 or http://dx.doi.org/10.2139/ssrn.1361620

Ohad Kadan

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Leonardo Madureira

Case Western Reserve University - Weatherhead School of Management ( email )

364 PBL Building
Cleveland, OH 44106
United States
216-368-5003 (Phone)

HOME PAGE: http://faculty.weatherhead.case.edu/madureira/

Rong Wang

Singapore Management University ( email )

Li Ka Shing Library
70 Stamford Road
Singapore 178901, 178899
Singapore

Singapore Management University - Lee Kong Chian School of Business ( email )

469 Bukit Timah Road
Singapore 912409
Singapore

Tzachi Zach (Contact Author)

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-4101 (Phone)

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