Identifying which stocks are peers of each other is of great importance to financial research and applications because it allows for an apples-to-apples comparison of companies and the potential exploitation of information spillover effects. The traditional way of grouping similar firms together is based on standard sector or industry classifications such as GICS or SIC codes. While these are useful as a starting point, they sometimes fail to spot homogenous groups of fundamentally related companies.

For instance, Apple and HP are both in the technology hardware and equipment retailing industry group and are arguably economically linked firms. Apple, on the other hand, is also part of the FAANG collection of stocks, but it falls within a different industry group or even sector compared to its Silicon Valley counterparts.²

Alternative peer groups have been proposed in the academic literature based on firms in the same geographic region,³ customer-supplier data,⁴ textual similarities in companies’ 10-K business descriptions,⁵ or comparable technologies based on patent data.⁶

More recently, Ali and Hirshleifer illustrated the efficacy in linking peers based on shared analyst coverage.⁷ This approach could be superior for several reasons. Firstly, the shared analyst network makes use of analysts’ human intelligence. Not only is it the analyst’s job to gather all relevant information about fundamentals such as information about related firms, customers, suppliers and competitors; an analyst is also more likely to adapt to changing market conditions than relatively static industry classifications.

Secondly, analyst linkages can uniquely identify connected company pairs rather than linking all firms within a sector, industry or a region. Similarly, analysts can also determine linkages beyond industry and geographic classifications, meaning that a company can be linked to firms both within its own but also outside its sector. Thirdly, the number of shared analysts can serve as a proxy for the strength of the relationship because not all relationships within the same region or sector will be equally important.

Figure 1 visualizes the connected company networks based on shared analyst coverage for Apple. The different colors represent different GICS industry groups. Classic information technology firms such as HP (technology hardware and equipment, purple), IBM (software and services, green) and Intel (semiconductors and semiconductor equipment, grey) are connected with Apple via shared analysts. However, we also observe that FAANG stocks from other sectors such as Meta Platforms, Alphabet, Netflix (all media and entertainment, pink) and Amazon (retailing, orange) are also closely related to Apple.

Therefore, we can conclude that the shared analyst coverage approach is an alternative and adaptive way to identify relevant firm peers.