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Equity valuation models and target price accuracy in Europe: Evidence from equity reports

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  • Imam, Shahed
  • Chan, Jacky
  • Shah, Syed Zulfiqar Ali

Abstract

This study examines whether European investment analysts prefer cash flow based valuation models over accrual based models, how accurate valuation models are and whether the use of cash flow based models (with or without accrual based models) improve forecast accuracy. We conduct a comprehensive content analysis of equity research reports for most of the firms on the components list of the Dow Jones Euro Stoxx 50 Index. We find that earnings multiples and the discounted cash flow (DCF) valuation models are the two most popular valuation models and the use of accrual based multiple alongside a cash flow based model improves the forecast error and this is in line with the intuition that accruals add value relevant information to cash flows. However, we also find that neither cash flow nor earnings multiples are superior to book value and return on equity (ROE) based models in terms of forecast error. Our results provide support for the use of book value and ROE based models which provide more precise forecasts and this, in turn, supports the use of accounting based models, i.e., a residual income model.

Suggested Citation

  • Imam, Shahed & Chan, Jacky & Shah, Syed Zulfiqar Ali, 2013. "Equity valuation models and target price accuracy in Europe: Evidence from equity reports," International Review of Financial Analysis, Elsevier, vol. 28(C), pages 9-19.
    • Handle: RePEc:eee:finana:v:28:y:2013:i:c:p:9-19
    DOI: 10.1016/j.irfa.2013.02.008
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    6. Yanfu Li, 2019. "Improving Analyst Target Price Performance Through Enhanced Valuation Techniques," Global Journal of Business Research, The Institute for Business and Finance Research, vol. 13(2), pages 1-12.
    7. Vidal, R. & Ribal, J., 2015. "Contrastes no parametricos de multiplos fundamentales frente a multiplos bursatiles en empresas alimentarias europeas," Economia Agraria y Recursos Naturales, Spanish Association of Agricultural Economists, vol. 15(01).
    8. Umar, Muhammad & Mirza, Nawazish & Rizvi, Syed Kumail Abbas & Naqvi, Bushra, 2022. "ESG scores and target price accuracy: Evidence from sell-side recommendations in BRICS," International Review of Financial Analysis, Elsevier, vol. 84(C).
    9. Chlomou, Grigoria & Demirakos, Efthimios, 2020. "How do financial analysts implement the Sum-of-the-Parts (SOTP) valuation framework?," International Review of Financial Analysis, Elsevier, vol. 70(C).
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    11. Samie Ahmed Sayed, 2015. "Should Analysts Go by the Book? Valuation Models and Target Price Accuracy in an Emerging Market," Global Business Review, International Management Institute, vol. 16(5), pages 832-844, October.
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    More about this item

    Keywords

    Accuracy; Analysts; Analysts' reports; Valuation models; Target price;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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