Common Analyst - Based Method for Defining Peer Firms

45 Pages Posted: 30 Dec 2012 Last revised: 18 Dec 2013

See all articles by Markku Kaustia

Markku Kaustia

Aalto University School of Business

Ville Rantala

University of Miami - Department of Finance

Date Written: December 17, 2013

Abstract

We develop a method for defining groups of peer firms on the basis of joint analyst coverage. Besides industry boundaries, analysts’ coverage choices can reflect other important aspects of firm relatedness. Our main performance tests concentrate on measuring peer group homogeneity. In these tests we pit the analyst-based method against common industry classifications such as SIC codes, Fama-French industries, The North American Industry Classification System (NAICS), and Global Industry Classification Standard (GICS). The analyst-based method consistently outperforms these common classifications. More generally, our results show that common analysts between firms offer a simple, yet powerful method for finding comparable firms.

Keywords: Peer firms, industry classification

JEL Classification: G19, G39

Suggested Citation

Kaustia, Markku and Rantala, Ville, Common Analyst - Based Method for Defining Peer Firms (December 17, 2013). Available at SSRN: https://ssrn.com/abstract=2194624 or http://dx.doi.org/10.2139/ssrn.2194624

Markku Kaustia

Aalto University School of Business ( email )

P.O. Box 1210
Helsinki, 00100
Finland
+3589 4313 8475 (Phone)
+3589 4313 8678 (Fax)

Ville Rantala (Contact Author)

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

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