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A stochastic model of superstardom: evidence from institutional investor's All‐American Research Team

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  • Raymond A.K. Cox
  • Robert T. Kleiman

Abstract

In this paper, we investigate the superstar phenomenon in the security analysis industry through an analysis of the probabilistic mechanism by which security analysts are selected for inclusion in Institutional Investor's All‐American Research Team (II AART). Specifically, we examine whether the statistical distribution of the number of first team appearances by security analysts conforms to the Yule distribution, which implies that luck rather than differential talent explains success. This is an important issue since an analyst's position on the AART is an important determinant of the individual's pay and reputation. Our research results reject the Yule distribution. Thus, consistent with previous empirical studies by Stickel [Stickel, S. E. (1992). Reputation and performance among security analysis. J Finance 47, 1811–1836; Stickel, S. E. (1995). The anatomy of the performance of buy/sell recommendations. Financ Anal J 51, 25–39] and Brown and Chen [Brown, L. D., & Chen, D.M. (1991). How good is the All‐American Research Team in forecasting earnings. J Bus Forecast 9, 14–18], we find that selection to the AART can be attributed to skill rather than luck.

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  • Raymond A.K. Cox & Robert T. Kleiman, 2000. "A stochastic model of superstardom: evidence from institutional investor's All‐American Research Team," Review of Financial Economics, John Wiley & Sons, vol. 9(1), pages 43-53, March.
    • Handle: RePEc:wly:revfec:v:9:y:2000:i:1:p:43-53
    DOI: 10.1016/S1058-3300(00)00016-1
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    1. Womack, Kent L, 1996. "Do Brokerage Analysts' Recommendations Have Investment Value?," Journal of Finance, American Finance Association, vol. 51(1), pages 137-167, March.
    2. Chung, Kee H & Cox, Raymond A K, 1990. "Patterns of Productivity in the Finance Literature: A Study of the Bibliometric Distributions," Journal of Finance, American Finance Association, vol. 45(1), pages 301-309, March.
    3. Adler, Moshe, 1985. "Stardom and Talent," American Economic Review, American Economic Association, vol. 75(1), pages 208-212, March.
    4. Butler, Kc & Lang, Lhp, 1991. "The Forecast Accuracy Of Individual Analysts - Evidence Of Systematic Optimism And Pessimism," Journal of Accounting Research, Wiley Blackwell, vol. 29(1), pages 150-156.
    5. Mikhail, MB & Walther, BR & Willis, RH, 1997. "Do security analysts improve their performance with experience?," Journal of Accounting Research, Wiley Blackwell, vol. 35, pages 131-157.
    6. MacDonald, Glenn M, 1988. "The Economics of Rising Stars," American Economic Review, American Economic Association, vol. 78(1), pages 155-166, March.
    7. Rosen, Sherwin, 1981. "The Economics of Superstars," American Economic Review, American Economic Association, vol. 71(5), pages 845-858, December.
    8. Stickel, Scott E, 1992. "Reputation and Performance among Security Analysts," Journal of Finance, American Finance Association, vol. 47(5), pages 1811-1836, December.
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    Cited by:

    1. Lawrence D. Brown & Andrew C. Call & Michael B. Clement & Nathan Y. Sharp, 2015. "Inside the “Black Box” of Sell‐Side Financial Analysts," Journal of Accounting Research, Wiley Blackwell, vol. 53(1), pages 1-47, March.
    2. Laura Spierdijk & Mark Voorneveld, 2009. "Superstars without Talent? The Yule Distribution Controversy," The Review of Economics and Statistics, MIT Press, vol. 91(3), pages 648-652, August.

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