Analysts’ Industry Expertise

By Ohad Kadan, Leonardo Madureira, Rong Wang, Tzachi Zach. 2012

224 citations recorded by the source corpus.

Industry expertise is an important aspect of sell-side research. We explore this aspect using a novel dataset of industry recommendations, which are often issued by strategy analysts. We study sell-side analysts' ability to rank industries relative to each other (across-industry expertise), and how it relates to analysts' ability to rank firms in a particular industry (within-industry expertise). We find that analysts express more optimism towards industries with higher levels of investment, past profitability, and past returns. Analysts exhibit across-industry expertise, as portfolios based on industry recommendations generate abnormal returns over both short and long horizons, beyond what would be explained by industry momentum. Additionally, industry recommendations contain information, which is orthogonal to the information revealed in firm recommendations, and more so for brokers who benchmark their firm recommendations to industry peers. Consequently, the investment value of sell-side analysts' recommendations is enhanced when both dimensions of industry expertise are utilized by considering industry and firm recommendations in combination.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/dbe66c8128b169a122dcd7725965df2502dafb73

Citations in the corpus

• Does the Scope of the Sell-Side Analyst Industry Matter? An Examination of Bias, Accuracy, and Information Content of Analyst Reports: Does the Scope of the Sell-Side Analyst Industry Matter? (2017, unknown): “Additionally, Kadan et al. (2012) are unable to find any broker that provides consistent coverage across all 68 GICS industries over time.”
• Analyst Initiations of Coverage and Stock Return Synchronicity (2012, unknown): “However, analysts also provide industry and market information to support their firm-level assessments, and many analysts make explicit recommendations regarding the industry outlook (Asquith et al. 2005; Kadan et al. 2011).”
• Geographic Lead-Lag Effects (2020, unknown): “Kadan et al. (2012) document, for example, that industry expertise is a key dimension that defines an analyst’s skill.”
• Externalities of Public Firm Presence: Evidence from Private Firms’ Investment Decisions (2013, unknown): “Prior research finds that financial analysts play a significant role in analyzing firms’ disclosures and providing additional insights about the firm and the industry (Asquith et al., 2005; Hutton et al., 2012; Kadan et al., 2012).”
• Analyst Information Discovery and Interpretation Roles: A Topic Modeling Approach (2018, unknown): “…is widely adopted by brokerages and analysts as their industry classification system and is superior to other industry classification schemes, such as SIC codes and NAICS codes, in identifying firms with their industry peers (Kadan et al. 2012; Boni and Womack 2006; Bhojraj et al. 2003).”