This study investigates whether, how and why industry performance can drive long-term return reversals. Using data from the UK, we find that firms in losing industries significantly outperform those in winning industries over the subsequent five years. These industry reversals remain strong and persistent after controlling for stock momentum, industry momentum, seasonal effects and traditional risk factors. We find a strong influence of past industry performance on stock return reversals. Our results also show that past industry performance is the driving force behind long-term reversals. Specifically, we find that industry components drive stock reversals, while past stock performance does not explain industry reversals. Further analysis suggests that industry reversals are present in both good and bad states of the economy and are stronger in industries with high valuation uncertainty. This implies that industry reversals are more likely to be a result of mispricing.

This study uses the quality of coverage decisions as a new metric to evaluate the performance of star and non-star analysts. We find that the coverage decisions of star analysts are better predictors of returns than those of non-star analysts. The return predictability of star analysts’ coverage decisions is stronger for informationally opaque stocks. We further exploit the staggered short selling deregulations, Google’s withdrawal, and the anti-corruption campaign as three quasi-natural experiments that create plausibly exogenous variations in the quality of information environment. These experiments show that the predictive power of star analysts’ coverage decisions strengthens (weakens) following a sharp deterioration (improvement) in firms’ information environment, consistent with the notion that star analysts possess superior ability to identify mispriced stocks. Overall, star analysts make better coverage decisions and play a superior role as information intermediaries, especially in poor information environment.