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Financial Analysts' Forecast Accuracy: Do valuation methods matter?

Author

Listed:
  • Elisa Cavezzali

    (Università Ca' Foscari Venice)

  • Ugo Rigoni

    (Università Ca' Foscari Venice)

Abstract

This study investigates how different ways to evaluate a company influence the accuracy of the target price. We know that finance theory and professional practice propose alternative approaches to the evaluation of a company. The literature on the relationship between the valuation methods used and target price accuracy is still scant, and the results are inconclusive and contradictory. Coding the valuation methods of 1,650 reports, we find that the accuracy of target prices decreases when the target price is based just on a main method. Furthermore, we show that methods based on company fundamentals and those based on market multiples lead to similar levels of accuracy. Among different classes of methods, there are no superior methods. Therefore, we argue that in order to improve forecast accuracy, analysts need to assess company value by choosing and applying a set of different methods, combining them and getting the average value, but regardless of the specific technique chosen.

Suggested Citation

  • Elisa Cavezzali & Ugo Rigoni, 2013. "Financial Analysts' Forecast Accuracy: Do valuation methods matter?," Working Papers 9, Venice School of Management - Department of Management, Università Ca' Foscari Venezia.
    • Handle: RePEc:vnm:wpdman:45
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    File URL: http://virgo.unive.it/wpideas/storage/2013wp9.pdf
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    References listed on IDEAS

    as
    1. Yonca Ertimur & Jayanthi Sunder & Shyam V. Sunder, 2007. "Measure for Measure: The Relation between Forecast Accuracy and Recommendation Profitability of Analysts," Journal of Accounting Research, Wiley Blackwell, vol. 45(3), pages 567-606, June.
    2. Efthimios Demirakos & Norman Strong & Martin Walker, 2010. "Does Valuation Model Choice Affect Target Price Accuracy?," European Accounting Review, Taylor & Francis Journals, vol. 19(1), pages 35-72.
    3. Stefano Bonini & Laura Zanetti & Roberto Bianchini & Antonio Salvi, 2010. "Target Price Accuracy in Equity Research," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(9‐10), pages 1177-1217, November.
    4. repec:bla:jfinan:v:58:y:2003:i:5:p:1933-1968 is not listed on IDEAS
    5. Asquith, Paul & Mikhail, Michael B. & Au, Andrea S., 2005. "Information content of equity analyst reports," Journal of Financial Economics, Elsevier, vol. 75(2), pages 245-282, February.
    6. Jing Liu & Doron Nissim & Jacob Thomas, 2002. "Equity Valuation Using Multiples," Journal of Accounting Research, Wiley Blackwell, vol. 40(1), pages 135-172, March.
    7. Loh, Roger K. & Mian, G. Mujtaba, 2006. "Do accurate earnings forecasts facilitate superior investment recommendations?," Journal of Financial Economics, Elsevier, vol. 80(2), pages 455-483, May.
    8. Richard Barker, 1999. "The role of dividends in valuation models used by analysts and fund managers," European Accounting Review, Taylor & Francis Journals, vol. 8(2), pages 195-218.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Anesten, Sebastian & Möller, Niclas & Skogsvik, Kenth, 2015. "The Accuracy of Parsimonious Equity Valuation Models - Empirical tests of the Dividend Discount, Residual Income and Abnormal Earnings Growth model," SSE Working Paper Series in Business Administration 2015:3, Stockholm School of Economics.

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    More about this item

    Keywords

    forecast accuracy; sell-side analysts; equity valuation; valuation methods;
    All these keywords.

    JEL classification:

    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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