THESIS
2014
Abstract
Essay I Product Similarity and Sell-Side Analysts
Although it is well known that analysts are industry specialists, little direct evidence
exists to explain this phenomenon. Since product similarity is a prominent feature of firms in
related industries, and Chamberlin (1933) and Hotelling (1929) famously show that product
differentiation is fundamental to industrial organization, product similarity may be a key
driver of analysts’ specialization. We find that analysts add a firm to (drop a firm from) their
portfolios if its product is more (less) similar to the other firms in their portfolios, and
analysts issue more accurate forecasts than other analysts covering the same firm when the
firm is more similar to the other firms in their portfolios. Also, analysts whose portfolios...[
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Essay I Product Similarity and Sell-Side Analysts
Although it is well known that analysts are industry specialists, little direct evidence
exists to explain this phenomenon. Since product similarity is a prominent feature of firms in
related industries, and Chamberlin (1933) and Hotelling (1929) famously show that product
differentiation is fundamental to industrial organization, product similarity may be a key
driver of analysts’ specialization. We find that analysts add a firm to (drop a firm from) their
portfolios if its product is more (less) similar to the other firms in their portfolios, and
analysts issue more accurate forecasts than other analysts covering the same firm when the
firm is more similar to the other firms in their portfolios. Also, analysts whose portfolios
comprise firms with greater product similarity experience better career outcomes. Further,
these beneficial effects attenuate as product similarity increases. Our study provides a direct
explanation for the industry specialization of analysts, and, to the best of our knowledge, is
the first to investigate the portfolio management decisions of analysts.
Essay II The Pricing Strategies of Industry Specialist Auditors: The Role of Product Similarity
We examine how industry specialist auditors price their clients differently within their
portfolio by analyzing the effects of product similarity on audit pricing in the United States.
We find that, at the firm level, companies with higher product similarity are generally
associated with lower audit fee and shorter reporting lag. At the industry level, industries with
higher level product similarity are associated with higher market concentration and market
dominancy, while homogeneous industries in product are associated with higher market
concentration but lower industry dominancy. Industry specialists who benefit from both cost
saving and market position building thus provide larger discounts to clients with higher
product similarity than non-industry specialists. Our study suggests that auditors use different
pricing strategies to manage their portfolios and contributes to our understating of audit
pricing.
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