Sell-Side Benchmarks | Weatherhead School at Case Western Reserve University

Sell-Side Benchmarks

Sell-Side Benchmarks



The Accounting Review, vol. 95, issue 1, pp. 211-232, January (1st Quarter/Winter) 2020


Sell-side analysts employ different benchmarks when defining their recommendations. For example, a ‘buy’ for some brokers means the stock is expected to outperform their peers in the same sector (sector benchmarkers), while for other brokers it means the stock is expected to outperform the market (market benchmarkers) or just some absolute return (total benchmarkers). We explore the validity and implications of these different benchmarks. Comparison of recommendations with the analysts’ long-term growth and earnings forecasts suggest that sector benchmarkers indeed rely less on across-industries measures of expectations, instead focusing more on ranking firms within their industries. We also show that sector benchmarkers tend to have more balanced distributions, with fewer optimistic and more pessimistic recommendations, when compared to the other benchmarkers. While event reactions suggest that investors take into account these differences in the distribution of recommendations, long-term returns indicate sells from sector benchmarkers are less valuable. The research carries implications for the investment value of the sell-side research as well as for revisiting the extensive literature on sell-side research.