The Impact of Alternative Data on Financial Forecasting and Capital Allocation
20 Years of SFI—A Look behind the Scenes of World-Class Finance Research
As part of SFI's 20th anniversary celebrations, we are showcasing a selection of finance research conducted by SFI faculty members. Today, SFI ranks among the top 10 finance institutes worldwide. Each edition of our showcase features one SFI professor, presenting their research area, key insights, and the practical impact of their work.
At their core, these blog posts reflect what lies at the heart of SFI: fostering world-class research, advancing knowledge, and bridging research and practice—all contributing to the long term prosperity of Switzerland's financial marketplace and the country as a whole. SFI, growing knowledge capital for the last 20 years and in the years to come.
This edition features SFI Professor Laurent Frésard from the Università della Svizzera italiana and his research on financial forecasting.
SFI Professor Frésard's passion for finance comes from his wanting to better understand the connections between financial markets and the real economy. One point of connection is the way in which both owners of small companies and CEOs of large corporations use asset prices as a guide for making decisions. But decision-making requires information about all horizons—both short- and long-term.
Back in 2019 SFI Professor Frésard taught the first SFI Master Class on the topic of data and technology in finance. These intensive learning units connect SFI professors and senior banking professionals to share knowledge and best practices and deepen understanding on frontier topics. During this first SFI Master Class (he has now taught about 20) he heard from people in the financial industry that financial institutions were using more and more alternative data, such as social media, satellite images, and credit card transactions. This prompted his interest in how the rise in the use of alternative data, mainly informative about short-term future outcomes, impacts the informativeness of financial forecasts.
A Shift in Financial Forecast Informativeness Affects the Real Economy
Research by SFI Professor Frésard in collaboration with coauthors shows that long-term forecasting is deteriorating and that easy access to alternative data explains about 20 percent of this trend. The shift toward alternative data results in capital allocation decisions that favor short-term investments. This is particularly damaging for businesses that have long-term investment opportunities such as sustainability projects, as there is less investment in the long term when the quality of long-term information is lacking.
Swiss businesses and investors will want to keep an eye on continuing research in this area to see how this impacts their decisions. A follow-up study by the researchers finds that firms in industries with longer horizons—shipping, mining, and utilities—are investing less than they should, illustrating a real impact on capital allocation. A further, follow-up paper will look at the impact of disclosure regulation on the longer horizon to see if that is another contributing factor to the deterioration of long-term forecasting.
More Information
- Does Alternative Data Improve Financial Forecasting? The Horizon Effect, The Journal of Finance, (with O. Dessaint and T. Foucault)
- The Horizon of Investors' Information and Corporate Investment, Swiss Finance Institute Research Paper No. 23-03 (with O. Dessaint and T. Foucault)
SFI Prof. Laurent Frésard (USI)
Laurent Frésard is Professor of Finance at the Università della Svizzera italiana. Previously, Professor Frésard was a member of the faculties at HEC Paris and the University of Maryland. His papers have been published in leading academic journals and he has received several grants and awards. In 2024 he became an editor at the Review of Finance.
"SFI has benefited my work in many ways. First, I get to work with excellent PhD students and learn from them. Second, it has been incredibly beneficial to connect with experts in the financial sector through SFI Master Classes and other knowledge exchange activities. Finally, I benefit from the hard work of my SFI predecessors, who have established a reputation for seriousness, independence, and quality."