The Search for Benchmarks: When Do Crowds Provide Wisdom?

Charles Lee, Paul Ma and Charles C. Y. Wang
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Charles C. Y. Wang: Harvard University

Research Papers from Stanford University, Graduate School of Business

Abstract: This study evaluates four broad categories of peer identification schemes used for economic benchmarking. Our results show the peer firms identified from aggregation of informed agents' revealed choices in Lee, Ma, and Wang (2014) perform best, followed by peers with the highest overlap in analyst coverage. These two approaches are superior to standard industry-based peers in explaining cross-sectional variations in base firms' out-of-sample: (a) stock returns, (b) valuation multiples, (c) growth rates, (d) R&D expenditures, (e) leverage, and (f) profitability ratios. Conversely, peers firms identified by Google and Yahoo Finance, as well as product market competitors gleaned from 10-K disclosures, turned in consistently worse performances. We contextualize these results in a stylized model that predicts when information aggregation across heterogeneously informed individuals is likely to lead to improvements in dealing with the problem of economic benchmarking.

JEL-codes: D83 G11 (search for similar items in EconPapers)
Date: 2015-05
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Citations: View citations in EconPapers (1)

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Working Paper: The Search for Benchmarks: When Do Crowds Provide Wisdom? (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:stabus:3373

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