Abstract:
This paper compares the ability of three prominent frameworks to explain the cross-section of expected stock returns. We conduct textual analysis on a comprehensive sample of analyst reports and online stock opinion articles and test whether the justifications provided in the recommendations mostly (1) emphasize the stocks’ level of risk, (2) indicate investor exuberance, or (3) point to a preference for stocks with high upside potential. We find that investors mostly point to the stocks’ upside potential. Our results suggest that non-standard investor preferences play an important role in explaining the cross-section of expected stock returns.