The heterogeneous impact of industry concentration on analyst performance

Abstract

We examine the impact that industry concentration has on superior and inferior analysts’ performance by utilizing a Herfindahl-Hirschman index of analyst specialization. Using broker M&As as a plausibly exogenous shock to analyst workloads, we find that superior analysts’ forecast accuracy improves when their coverage is more concentrated within a few industries. However, there is no evidence of an equivalent improvement for inferior analysts. We argue that this is due to superior analysts having a comparative advantage in utilizing intra-industry relevant information and, therefore, the more concentrated their portfolio, the better they can extract this type of information for pricing stocks. We also find that investors who trade according to the buy-sell recommendations of superior analysts who have recently experienced increased industry concentration can gain extra returns on their stock portfolio.