Analyst's Industry Expertise



Journal of Accounting & Economics, 2-3 ed., vol. 54, pp. 95-120, December 2012


In addition to firm recommendations, brokers also issue recommendations for industries. We study these recommendations using data newly available from IBES. First, we find that the distribution of industry recommendations is quite balanced. Brokers tend to issue optimistic recommendations to industries that show high levels of R&D intensity, past profitability and past returns, as well as to industries in which they are active in providing underwriting services. Second, industry recommendations appear to have investment value: portfolios long in industries about which analysts are optimistic and short in industries about which analysts are pessimistic generate significant abnormal returns. Finally, we find that industry recommendations contain information that is orthogonal to that included in firm recommendations. This evidence sheds new light on the interpretation and investment value of firm recommendations. It suggests that analysts typically benchmark their firm recommendations to industry peers, even when they proclaim to be using a market benchmark. In line with this view, we show that the investment value of analysts’ recommendations is enhanced when both industry and firm recommendations are used jointly.

Leonardo Madureira

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Weatherhead School of Management
Case Western Reserve University

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Cleveland, Ohio 44106-7235 USA