Just Look: Knowing Peers with Image Representation 

Abstract

What does an industry look like? We present a novel approach to assess firm similarity by analyzing four million visuals. Leveraging machine learning, we identify images representing companies' operations, forming Image Firm Similarities (IFS). IFS mirrors investor-defined peer groups and performs competitively against SIC, GICS, NAICS, and text-based similarity, akin to the brain's visual processing superiority. This outperformance appears in pair trading, diversification, and industry momentum strategies. The effectiveness of IFS is attributed to dynamic reclassification and high investor agreement within industries, leading to significant demand and supply effects on stock prices. IFS excels in industries with growth and intangibility.

Keywords: Images, Firm similarities, Diversification, Industry momentum

JEL Classification: G11, G12, G00