Title

Which Investors Matter for Global Equity Valuations and Expected Returns?

Author(s)

Ralph S. J. Koijen Ralph Koijen (University of Chicago)

Robert J. Richmond Robert Richmond (New York University)

Motohiro Yogo Motohiro Yogo (Princeton University)

Abstract

To understand why valuation ratios vary across firms and over time, a large literature in asset pricing decomposes these ratios into expected returns and expected growth rates of firm fundamentals. This literature leaves two fundamental questions unanswered: (i) what information do investors attend to in forming their demand beyond prices and (ii) how important are different investors in the price formation process? We use a demand system approach to answer both questions. We first show that a small set of characteristics explains the majority of variation in a panel of firm-level valuation ratios across countries. We then estimate an asset demand system using investor-level holdings data, allowing for flexible substitution patterns within and across countries. We use this framework to measure the relative importance of investors — differentiated by type, size, and active share — for connecting firm characteristics to prices and long-horizon expected returns.

Creation Date

2020-06

Section URL ID

Paper Number

2020-34

URL

https://www.nber.org/system/files/working_papers/w27402/w27402.pdf

File Function

Jel

G1

Keyword(s)

price formation, investors

Suppress

false

Series

13