Conference Agenda

In this study, I examine the value of information from sell-side analysts by analyzing a large corpus of their written reports. Using embeddings from state-of-the-art large language models, I show that textual information in analyst reports explains 10.19% of contemporaneous stock returns out-of-sample, a value that is economically more significant than quantitative forecasts. I then perform a Shapley value decomposition to assess how much each topic within the reports contributes to explaining stock returns. The results show that analysts' income statement analyses account for more than half of the reports' explanatory power. Expressing these findings in economic terms, I estimate that early acquisition of analysts' reports can yield significant profits. Analysts' information value peeks in the first week following earnings announcements, highlighting their vital role in interpreting new financial data.

We uncover financial professionals’ mental models—the narratives they use to explain their subjective beliefs. Using 82,000 equity reports, we prompt large language models (LLMs) to extract 3.5 million narratives, each combining a topic, valuation channel, sentiment, and time outlook. To validate the reliability of our output, we introduce a multi-step LLM-based approach and new diagnostic tools. We establish three sets of findings. First, narratives are centered around a limited set of topics, primarily focused on top-line items, with variation in topic focus over time and across industries. Narratives are mostly forward-looking, with three times as many arguments focusing on the future as on the past. Second, differences in topic focus, sentiment, and time outlook across forecasters strongly predict the extent of disagreement in their subjective quantitative forecasts. Lastly, time-series variation in the average narrative’s sentiment and in the average narrative’s focus on top-line items closely track Shiller’s CAPE ratio (ρ = 0.84 and ρ = 0.42), and the cross-sectional variation in narratives predicts key asset pricing patterns. Narratives associated with growth stocks are more optimistic and forward-looking than those for value stocks, consistent with forecasters (mis)perceiving growth stocks as having above-average growth potential. Overall, this paper helps bridge the gap between ‘what forecasters believe’ and ‘why they believe it.’