Investor Expectation Influenced by Firm Beliefs

Yifei Chen, Finance PhD Student
Laura Gu, Accounting PhD Student

In this study, we (Chen and Gu) ask "Can investor expectations be influenced by firm beliefs? If so, how does the influence of firm beliefs on investor expectation affect stock return and market efficiency?" Investor expectation plays a pivotal role in determining equity premium and risk-free rates. Despite the pivotal role of firm disclosures as a primary information source for markets, prior research predominantly focused on studying the mechanisms of investor beliefs, utilizing market-wide and macroeconomics. We extend this literature by examining whether firm beliefs can impact investor expectation, and how the relation affects stock return and market efficiency. We propose a novel approach to understanding market dynamics by analyzing firm expectations with Large Language Models. We extract firm-level expectations from forward-looking statements in corporate disclosures and investigate their impact on asset returns. We aim to shed light on the interplay between different market participants' beliefs and their collective influence on financial markets.