What Drives Very Long-Run Cash Flow Expectations?

Abstract

We study the very long-run expectations of professional forecasters using a large novel dataset that combines forecasters’ beliefs about firms’ terminal growth rate (TGR), qualitative text discussions of their beliefs, and detailed forecaster demographic information. We establish four findings about forecasters’ TGR beliefs—their expectations about firms’ long-run growth rate “until infinity.” First, TGR expectations contain distinct economic information compared to shorter forecasting series and robustly predict realized long-run firm growth. Second, consistent with firm life-cycle models, a rich set of factors explains TGR beliefs for young firms, while country and industry factors account for most of the variation for mature firms. Third, there exists large, persistent heterogeneity in TGR expectations across forecasters, with forecaster demographics explaining a sizable share of this heterogeneity. Lastly, we use forecasters’ textual discussions to estimate a topic model and open the black box behind quantitative expectations. Divergent long-term growth expectations stem primarily from subjective interpretations of similar topics, rather than from coverage of different topics.

Keywords: Long-term expectations, behavioral finance, valuation, professional forecasters, analyst identities and backgrounds, firm life cycle, machine learning

JEL Classification: D24, D25, D46, D84, G17, G31, G41