Microeconometrics Group Seminar November 18, 2021

Title: Inside the mind of expected stock returns

Presenter: Byoung-Hyoun Hwang (Nanyang Technological University)

We consider buy recommendations written on stocks with firm characteristics that prior literature shows predict low returns. We conduct textual analysis and test whether the justifications provided in the buy recommendations are most congruent with a risk framework, investor exuberance, or preference for positively skewed assets. We find that in their buy recommendations, investors most frequently point to a stock’s upside potential; they least frequently point to a stock’s low level of risk. Our results suggest that non-standard investor preferences play an important role in explaining the cross-section of expected stock returns.