In chapter one, I examine the predictive content of subjective return expectations derived from price targets issued by equity analysts. Equity price targets are an ubiquitous feature of the financial information landscape, but it is not clear how informative they actually are. In this chapter, I show that the cross-section of price-target implied subjective return expectations contains rich informational content for forecasting returns. In-sample, I find that expected returns correlate strongly with average cross-sectional returns to a large panel of portfolios formed on the basis of observable firm characteristics. In out-of-sample exercises, forecasting models using subjective expectations are shown to offer more accurate predictions for portfolio returns than several other commonly employed, cross-sectional predictors, including the book-to-market and dividend-price ratios, momentum, and forward-looking cash-flow measures. Furthermore, these differences are shown to be economically relevant, with conditional portfolios formed on the basis of subjective expectations offering substantially improved risk-adjusted returns compared to many of the other predictors considered. The relative informational content, as well as the production by analysts, of subjective return expectations is found, however, to peak during recessions, with negligible predictive advantage discernible in expansions.
In chapter two, my coauthors (Adam Rej, with CFM; David Thesmar, with MIT, CEPR, and NBER) and I empirically analyze a large panel of firm sales growth expectations. We find that the relationship between forecast errors and lagged revision is non-linear. Forecasters underreact to typical (positive or negative) news about future sales, but overreact to very significant news. To account for this non-linearity, we propose a simple framework, where (1) sales growth dynamics have a fat-tailed high frequency component and (2) forecasters use a simple linear rule. This framework qualitatively fits several additional features of data on sales growth dynamics, forecast errors, and stock returns.
In chapter three, my coauthor (Ken Teoh, with Columbia) and I construct a novel text-based measure of firm-level attention to macroeconomic conditions and document that stocks associated with higher macroeconomic attention earn lower returns. Moving from the bottom decile to top decile of macroeconomic attention decreases a stock’s average return by 11.6\% per year. We propose a risk-based explanation in which stocks with higher macroeconomic attention contribute less idiosyncratic cash flow risk to the investor’s portfolio, hence earn lower expected returns. Decomposing the unexpected returns of macroeconomic attention-sorted portfolios into cash flow and discount rate news, we find that portfolios with higher macroeconomic attention stocks have lower cash flow risk.
| Identifer | oai:union.ndltd.org:columbia.edu/oai:academiccommons.columbia.edu:10.7916/0e7s-xp17 |
| Date | January 2023 |
| Creators | Larsen-Hallock, Eugene Walter |
| Source Sets | Columbia University |
| Language | English |
| Detected Language | English |
| Type | Theses |
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