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Can analysts assess fundamental risk and valuation uncertainty? An empirical analysis of scenario-based value estimates

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  • Joos, Peter
  • Piotroski, Joseph D.
  • Srinivasan, Suraj

Abstract

We use a data set of sell-side analysts' scenario-based equity valuation estimates to examine whether analysts can assess the state-contingent risk surrounding a firm's fundamental value. We find that the spread in analysts’ scenario-based valuations captures the riskiness of operations and predicts the absolute magnitude of long-run valuation errors and future changes in firm fundamentals.We also show that analysts’ assessment of fundamental risk and its predictive ability systematically improved after the financial crisis, consistent with the macroeconomic shock raising analysts’ awareness of firms’ systematic risk exposures.

Suggested Citation

  • Joos, Peter & Piotroski, Joseph D. & Srinivasan, Suraj, 2016. "Can analysts assess fundamental risk and valuation uncertainty? An empirical analysis of scenario-based value estimates," Journal of Financial Economics, Elsevier, vol. 121(3), pages 645-663.
    • Handle: RePEc:eee:jfinec:v:121:y:2016:i:3:p:645-663
    DOI: 10.1016/j.jfineco.2016.05.003
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    References listed on IDEAS

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    1. Daphne Lui & Stanimir Markov & Ane Tamayo, 2012. "Equity Analysts and the Market's Assessment of Risk," Journal of Accounting Research, Wiley Blackwell, vol. 50(5), pages 1287-1317, December.
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    More about this item

    Keywords

    Analysts; Fundamental risk assessment; Scenario-based valuations; Target prices;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G01 - Financial Economics - - General - - - Financial Crises

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