Does Alternative Data Improve Financial Forecasting? The Horizon Effect
60 Pages Posted: 17 Nov 2020 Last revised: 22 Jul 2021
Date Written: July 20, 2021
We analyze the effect of alternative data on the informativeness of financial forecasts. Our hypothesis is that the emergence of alternative data increases the net benefit of collecting short-term information about firms' cash flows more than the benefit of collecting long-term information. If this hypothesis is correct, and forecasting short-term and long-term cash flows are distinct tasks, alternative data should make short-term forecasts more informative but long-term forecasts less so. We confirm this prediction empirically for sell-side equity analysts' forecasts using a new measure of forecast informativeness at various horizons.
Keywords: Big data, Financial analysts' forecasts, Forecasting horizon, Forecasts' informativeness, Social media
JEL Classification: D84, G14, G17, M41
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