Using Chinese A-share listed firms from 2015 to 2022, we construct a firm-level AI Narrative Gap — the gap between a firm's LLM-scored AI strategic narrative intensity and its subsequent two-year growth in real AI capital expenditure. We show that a wider AI Narrative Gap is associated with significantly more optimistic and less accurate analyst earnings forecasts. These distorted expectations, in turn, predict lower subsequent stock returns, lower industry-adjusted abnormal returns, and weaker future accounting performance. A double-sort portfolio placing firms simultaneously in the highest quintile of the AI Narrative Gap and highest quintile of analyst optimism earns a mean return 22.8 percentage points below that of the lowest quintile on both dimensions (t = −5.10). The return reduction in the AI Narrative Gap coefficient is attenuated but not eliminated after controlling for optimism, consistent with a partial expectation-distortion channel. Together, the evidence points to AI-themed narrative inflation as a mechanism that inflates investor and analyst expectations before precipitating return reversals (Lee et al., 2026; Jia et al., 2025; Chehimi, 2025).

We propose the AI Narrative Gap as a novel firm characteristic—the systematic divergence between a firm’s AI strategic narrative intensity and its subsequent AI capital expenditure commitment—and document its capital market consequences. Using Chinese A-share listed firms from 2015 to 2022, we show that firms with a wider AI Narrative Gap attract significantly more optimistic and less accurate analyst earnings forecasts. These distorted expectations, in turn, predict lower subsequent stock returns, lower industry-adjusted abnormal returns, and weaker future accounting performance. A double-sort portfolio placing firms simultaneously in the highest tercile of the AI Narrative Gap and highest tercile of analyst optimism earns a mean return 22.8 percentage points below that of the lowest tercile on both dimensions (t = −5.10). The return reduction in the AI Narrative Gap coefficient is attenuated but not eliminated after controlling for optimism, consistent with a partial expectation-distortion channel. Collectively, these results establish the AI Narrative Gap as a cross-sectionally informative firm characteristic that captures the credibility of a firm’s AI strategic identity, with systematic implications for analyst expectations and asset prices.