Does sophistication affect long-term return expectations? Evidence from financial advisers' exam scores

Markku Kaustia, Antti Lehtoranta and Vesa Puttonen

No 3, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: We use unique data fromfinancial advisers' professional exam scores and combine it with other variables to create an index of financial sophistication. Using this index to explain long-term stock return expectations, we find that more sophisticated financial advisers tend to have lower return expectations. A one standard deviation increase in the sophistication index reduces expected returns by 1.1 percentage points. The effect is stronger for emerging market stocks (2.3 percentage points). The sophistication effect contributes 60% to the model fit, while employer fixed effects combined contribute less than 30%. These results help understand the formation of potentially excessively optimistic expectations.

Keywords: stock return expectations; sophistication; financial literacy; adviser (search for similar items in EconPapers)
JEL-codes: D84 G11 G24 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:3

DOI: 10.2139/ssrn.2209649

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