DP15786 Does Alternative Data Improve Financial Forecasting? The Horizon Effect

Author(s): Olivier Dessaint, Thierry Foucault, Laurent Frésard
Publication Date: February 2021
Keyword(s): Alternative data, Forecasting horizon, Forecasts' informativeness, Security analysts, social media
JEL(s): D84, G14, G17, M41
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15786

We analyze the effect of alternative data on the informativeness of financial forecasts. Our starting hypothesis is that the emergence of alternative data reduces the cost of obtaining information about firms' short-term cash-flows more than their long-term cash-flows. If correct, and forecasting short-term and long-term cash-flows are distinct tasks, analysts will reduce effort to process long-term information when alternative data become available. Alternative data thus makes long-term forecasts less informative, while increasing the informativeness of short-term forecasts. We confirm this prediction using variations in analysts' exposure to social media data and a new measure of forecast informativeness at various horizons.