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Does Sophistication Affect Long-Term Return Expectations? Evidence from Financial Advisers’ Exam Scores

SAFE Working Paper No. 3

50 Pages Posted: 1 Feb 2013  

Markku Kaustia

Aalto University School of Business

Antti Lehtoranta

Bank of Finland; Aalto University

Vesa Puttonen

Aalto University - School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: January 22, 2013

Abstract

We use unique data from financial advisers’ professional exam scores and combine it with other variables to create an index of financial sophistication. Using this index to explain long-term stock return expectations, we find that more sophisticated financial advisers tend to have lower return expectations. A one standard deviation increase in the sophistication index reduces expected returns by 1.1 percentage points. The effect is stronger for emerging market stocks (2.3 percentage points). The sophistication effect contributes 60% to the model fit, while employer fixed effects combined contribute less than 30%. These results help understand the formation of potentially excessively optimistic expectations.

Keywords: stock return expectations, sophistication, financial literacy, adviser

JEL Classification: D84, G11, G24

Suggested Citation

Kaustia, Markku and Lehtoranta, Antti and Puttonen, Vesa, Does Sophistication Affect Long-Term Return Expectations? Evidence from Financial Advisers’ Exam Scores (January 22, 2013). SAFE Working Paper No. 3. Available at SSRN: https://ssrn.com/abstract=2209649 or http://dx.doi.org/10.2139/ssrn.2209649

Markku Kaustia (Contact Author)

Aalto University School of Business ( email )

P.O. Box 1210
Helsinki, 00100
Finland
+3589 4313 8475 (Phone)
+3589 4313 8678 (Fax)

Antti Lehtoranta

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

Aalto University ( email )

PO Box 21220
Helsinki, AALTO 00076
Finland

HOME PAGE: http://finance.aalto.fi/en/people/lehtoranta/

Vesa Puttonen

Aalto University - School of Business ( email )

P.O. Box 1210
Helsinki, 00100
Finland
358 407090284 (Phone)
358 0 4313678 (Fax)

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