What Does it Take to Become a Superstar? Evidence from Institutional Investor Rankings of Financial Analysts

Abstract

We study the attributes of superstar financial analysts ranked in the Institutional Investor magazine annual surveys from 1991 to 2000. In addition to documenting a strong positive relation between the rankings and analyst performance, we also investigate whether the performance by ranked analysts is due to luck or superior ability. Our results indicate that ranked analysts' performance is likely due to their superior ability because there is performance persistence and the ranked analysts are recognized as leaders by other analysts even before they first become ranked by Institutional Investor. We next test whether the superior ability of ranked analysts stems from their greater experience or innate talent. Our findings point to an "innate talent" rather than an "experience" explanation for the ranked analysts. Collectively, the evidence supports the notion that the Institutional Investor rankings serve the meaningful role of identifying high quality analysts in the labor market and is inconsistent with the allegation that the rankings are 'popularity contests' with little substance.

Keywords: financial analysts, rank-order tournament, superstar

JEL Classification: G10, J33, M41