Revisiting the Cross-Section of Expected Stock Returns: Evidence from a Textual Analysis of Buy Recommendations

Our paper examines sell-side analyst reports and online stock opinion articles, which recommend that investors buy stocks that, based on prior literature, trade at comparatively high prices and earn low future returns. We conduct textual analysis and test whether the justifications provided in these buy recommendations mostly (1) emphasize a stock’s safe-haven quality, (2) indicate general investor exuberance, or (3) point to a specific preference for stocks with high upside potential. We find that the buy recommendations mostly emphasize stocks’ upside potential. Our results suggest that non-traditional investor preferences play a material role in explaining the cross-section of expected stock returns.