A large literature in asset pricing decomposes valuation ratios into expected returns and expected growth rates of firm fundamentals to understand why valuation ratios vary across firms and over time. 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 various investors in the price formation process? We use a demand system approach to answer both questions. Empirically, we 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 international asset demand system using investor-level holdings data in Great Britain and the United States, allowing for flexible substitution patterns within and across countries. We use this framework to measure the contribution of each institutional type in linking characteristics to prices and long-horizon expected returns. Investment advisors, largely driven by their size, are most influential among all institutional types. Conditional on size, hedge funds are the most, and long-term investors (insurance companies and pension funds) are the least influential.

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