Common Analyst - Based Method for Defining Peer Firms
45 Pages Posted: 30 Dec 2012 Last revised: 18 Dec 2013
Date Written: December 17, 2013
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
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