Peer effects in professional analysts’ choice of their portfolio of companies

Abstract

Analysts’ earnings forecasts are well known to be affected by herding behavior. This article provides evidence that herding might also play a role in analysts’ choice of coverage portfolio. Using the I/B/E/S database we show that there are strong peer effects at work in analysts’ choice of their portfolio of companies that go beyond specialization in teams and for certain sectors. To identify the factors driving these findings, we adopt a model of link formation within the bipartite network defined by analyst-company pairs. The strongest influence on imitation comes from the performance of other analysts. In contrast, professional experience and other individual characteristics seem to exert only a minor influence.

Keywords:

• Financial analysts
• Peer effects
• Networks
• Actor-based model

Acknowledgements

The idea for this paper emerged from discussions during a visit of Thomas Lux to Deakin University’s Business School. He is most grateful to the faculty of the school for its excellent hospitality and many extremely fruitful interactions. Particular thanks go to Ruipeng Liu, Ed Lin, Hong Feng Zhang, Tze Chuan Ang and Daisy Doan for very helpful discussions. We gratefully acknowledge the helpful comments by two anonymous reviewers.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

† Note that it is easy to account for time-varying network compositions simply by excluding from sets of actors and non-actors those that have not been present at the respective time step in the data.

† The second index in s_i1 just indicates that this is the first effect in our list.

† Interesting effects would result if outdegree itself would enter negatively, but (outdegree-) activity comes with a positive sign. In this case, the network would consist of a large number of nodes with few links and some hubs that accumulate a huge number of connections. A case in question is the network of interbank loans (cf. Finger and Lux 2017).