Subjective Beliefs of Analysts and Institutions

• Applicant: Dr. Heiner Beckmeyer
• Subject Area: Accounting and Finance
• Term: since 2024
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 536564399

The objective of the proposed project is to form a better understanding of the preferences and belief structure of central players in modern financial markets. It seeks to answer how financial analysts and institutional investors form expectations about the stock market, how these subjective expectations influence the prices of assets, and to which degree the expectations of analysts and institutions are intertwined. The first work package, “The Value of Analyst Return Forecasts“, investigates the determinants and the value of analysts' return forecasts. I first extract the determinants of these subjective expectations by estimating a latent factor model on cross-sectional return forecasts, which allows to understand the importance of and sensitivity to individual firm-level characteristics, the commonality across forecasts made for different firms, the general complexity of analyst return forecasts, as well as the prevalence of systematic biases. The work package then investigates the economic value of analyst expectations. The second work package, “Aggregating Analyst Forecasts“, proposes a novel way to aggregate forecasts made by financial analysts. The typical firm is covered by multiple analysts from different brokerages, each with his or her own set of information that enters the respective forecast. I introduce a machine learning method to estimate an optimal aggregation function given the characteristics of the target firm, as well as the characteristics of the analysts, with regards to both their past experience with the target firm, and the firm's competitors. This improved consensus is designed to accurately forecast firms' future earnings, and thus serves as a better expectation of firm-level cash-flows. I use it to revisit the evidence on the stock price reaction to consensus forecast revisions, and whether firm managers exploit predictable biases in the typically used median consensus by timing their decision to issue or redeem shares. The third work package, “Preferences of Institutional Investors Revealed by their Portfolios”, develops a novel revealed preferences approach based on the portfolio holdings of institutional investors. While previous studies infer the preferences of mutual and hedge fund investors, this work package revolves around inferring the preferences of the fund managers. About 68% of the total U.S. market capitalization is held by investors required to file form 13F with the SEC, making their demand a key driver of individual asset prices. Uncovering their preferences for risks and opportunities presented by the assets they invest in is thus another step towards understanding the determinants of asset prices.

• DFG Programme: Research Grants