Which Investors Matter for Equity Valuations and Expected Returns?

49 Pages Posted: 28 Jun 2019 Last revised: 31 Mar 2020

See all articles by Ralph S. J. Koijen

Ralph S. J. Koijen

University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Robert Richmond

New York University (NYU) - Department of Finance

Motohiro Yogo

Princeton University - Department of Economics; National Bureau of Economic Research

Date Written: December 17, 2019

Abstract

To understand why valuation ratios vary across firms and over time, a large literature in asset pricing decomposes these ratios into expected returns and expected growth rates of firm fundamentals. This literature leaves two fundamental questions unanswered: (i) what information do investors attend to in forming their demand beyond prices and (ii) how important are different investors in the price formation process? We use a demand system approach to answer both questions. We first show that a small set of characteristics explains the majority of variation in a panel of firm-level valuation ratios across countries. We then estimate an asset demand system using investor-level holdings data, allowing for flexible substitution patterns within and across countries. We use this framework to measure the relative importance of investors — differentiated by type, size, and active share — for connecting firm characteristics to prices and long-horizon expected returns.

Suggested Citation

Koijen, Ralph S. J. and Richmond, Robert and Yogo, Motohiro, Which Investors Matter for Equity Valuations and Expected Returns? (December 17, 2019). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2019-92; NYU Stern School of Business. Available at SSRN: https://ssrn.com/abstract=3378340 or http://dx.doi.org/10.2139/ssrn.3378340

Ralph S. J. Koijen (Contact Author)

University of Chicago - Booth School of Business ( email )

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HOME PAGE: http://faculty.chicagobooth.edu/ralph.koijen/

Centre for Economic Policy Research (CEPR) ( email )

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National Bureau of Economic Research (NBER) ( email )

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Robert Richmond

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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Motohiro Yogo

Princeton University - Department of Economics ( email )

Julis Romo Rabinowitz Building
Princeton, NJ 08544
United States

HOME PAGE: http://sites.google.com/site/motohiroyogo/

National Bureau of Economic Research

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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