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The Search for Benchmarks: When Do Crowds Provide Wisdom?

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Listed:
  • Lee, Charles M. C.

    (Stanford University)

  • Ma, Paul

    (University of MN)

  • Wang, Charles C. Y.

    (Harvard University)

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.

Suggested Citation

  • Lee, Charles M. C. & Ma, Paul & Wang, Charles C. Y., 2015. "The Search for Benchmarks: When Do Crowds Provide Wisdom?," Research Papers 3373, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:3373
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    Cited by:

    1. Gao, Ning & Hua, Chen & Khurshed, Arif, 2021. "Loan price in mergers and acquisitions," Journal of Corporate Finance, Elsevier, vol. 67(C).
    2. Aobdia, Daniel & Cheng, Lin, 2018. "Unionization, product market competition, and strategic disclosure," Journal of Accounting and Economics, Elsevier, vol. 65(2), pages 331-357.

    More about this item

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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