Download this Paper Open PDF in Browser

Search Based Peer Firms: Aggregating Investor Perceptions through Internet Co-Searches

58 Pages Posted: 6 Nov 2012 Last revised: 5 Oct 2014

Charles M.C. Lee

Stanford University - Graduate School of Business

Paul Ma

University of Minnesota - Carlson School of Management

Charles C. Y. Wang

Harvard Business School

Date Written: July 2, 2014

Abstract

Applying a “co-search” algorithm to Internet traffic at the SEC's EDGAR web-site, we develop a novel method for identifying economically-related peer firms and for measuring their relative importance. Our results show that firms appearing in chronologically adjacent searches by the same individual (Search-Based Peers or SBPs) are fundamentally similar on multiple dimensions. In direct tests, SBPs dominate GICS6 industry peers in explaining cross-sectional variations in base firms' out-of-sample: (a) stock returns, (b) valuation multiples, (c) growth rates, (d) R&D expenditures, (e) leverage, and (f) profitability ratios. We show that SBPs are not constrained by standard industry classification, and are more dynamic, pliable, and concentrated. We also show that co-search intensity captures the degree of similarity between firms. Our results highlight the potential of the collective wisdom of investors ― extracted from co-search patterns ― in addressing long-standing benchmarking problems in finance.

Keywords: peer firm, EDGAR search traffic, revealed preference, co-search, industry classification

JEL Classification: D83, G0, M2

Suggested Citation

Lee, Charles M.C. and Ma, Paul and Wang, Charles C. Y., Search Based Peer Firms: Aggregating Investor Perceptions through Internet Co-Searches (July 2, 2014). Journal of Financial Economics (JFE), Forthcoming; Rock Center for Corporate Governance at Stanford University Working Paper No. 128; Harvard Business School Accounting & Management Unit Working Paper No. 13-048. Available at SSRN: https://ssrn.com/abstract=2171497 or http://dx.doi.org/10.2139/ssrn.2171497

Charles M.C. Lee

Stanford University - Graduate School of Business ( email )

Stanford Graduate School of Business
655 Knight Way
Stanford, CA 94305-5015
United States
650-721-1295 (Phone)

Paul Ma

University of Minnesota - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

HOME PAGE: http://www.paulma.org

Charles C. Y. Wang (Contact Author)

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Paper statistics

Downloads
1,009
Rank
17,129
Abstract Views
6,112