Does Alternative Data Improve Financial Forecasting? The Horizon Effect

Abstract

Existing research suggests that alternative data is mainly informative about short-term future outcomes. We show theoretically that the availability of short-term oriented data can induce forecasters to optimally shift their attention from the long-term to the short-term because it reduces the cost of obtaining short-term information. Consequently, the informativeness of their long-term forecasts decreases, even though the informativeness of their short-term forecasts increases. We test and confirm this prediction by considering how the informativeness of equity analysts' forecasts at various horizons varies over the long run and with their exposure to social media data.

Keywords: Big data, Financial analysts' forecasts, Forecasting horizon, Forecasts' informativeness, Social media

JEL Classification: D84, G14, G17, M41