Analysts' Choice of Peer Companies

• In Event: Comparable Firms: Choice and Consequences

Abstract

This is the first large-scale study to examine the peer companies used by sell-side equity analysts in their research reports. Using a unique hand-collected data set, we investigate the manner in which analysts choose peer companies as well as the relation between peer valuation and peer choice by analysts. We first show that analysts are more likely to choose peer firms that are similar in size, leverage, asset turnover, industry classification, and trading volume, to the firm they are recommending. However, controlling for those firm characteristics, we find that analysts on average select peer companies with high valuations, consistent with analysts choosing peers strategically. We further find that this effect varies systematically with analysts’ reputation, analysts’ incentives, and expected firm growth. We also find partial support for the idea that the selection of peers with high valuations helps explain the widely documented optimistic bias in stock recommendations.

Authors

• Gus De Franco, University of Toronto

• Ole-Kristian Hope, University of Toronto

• Stephannie A Larocque, University of Notre Dame