Artikel

How valuation approach choice affects financial analysts’ target price accuracy

This paper examines which valuation approaches financial analysts use to value a company and whether the chosen valuation approach affects the target price accuracy. To address these questions, we conduct content analyses of 867 hand-collected analyst reports on German publicly listed companies published between January 2014 and June 2017. We find that sell-side analysts more frequently use the single-period market approach when formulating target prices, followed by the multi-period income approach, and a mixture of both by combining the results, the so-called hybrid valuation approach. Additionally, we show that 612 of the analyzed analyst reports are based on a holistic valuation methodology instead of a sum of the parts valuation technique. Both univariate and multivariate analyses emphasize that the choice of valuation approach is significantly associated with the accuracy of price targets. Specifically, the income and market approach lead to significantly more accurate target prices compared to the hybrid approach. We also find that the target price accuracy is higher when analysts apply the holistic rather than the sum of the parts valuation approach to determine the fundamental value of the company. Additional results emphasize that target price accuracy improves when analysts use the sum of the parts valuation that bases solely on market or income approaches rather than hybrid approaches. Hence, we contribute to theory and practice by providing evidence on the link between the choice of valuation approach and the analysts' target price accuracy as well as on the performance of certain valuation techniques.

Language
Englisch

Bibliographic citation
Journal: Journal of Business Economics ; ISSN: 1861-8928 ; Volume: 92 ; Year: 2021 ; Issue: 5 ; Pages: 741-779 ; Berlin, Heidelberg: Springer

Classification
Management
Portfolio Choice; Investment Decisions
Asset Pricing; Trading Volume; Bond Interest Rates
Financial Forecasting and Simulation
Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies
Subject
Target prices
Analyst reports
Financial analysts
Valuation methods
Sum of the parts

Event
Geistige Schöpfung
(who)
Erkilet, Gülcan
Janke, Gerrit
Kasperzak, Rainer
Event
Veröffentlichung
(who)
Springer
(where)
Berlin, Heidelberg
(when)
2021

DOI
doi:10.1007/s11573-021-01061-w
Last update
10.03.2025, 11:45 AM CET

Data provider

This object is provided by:
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.

Object type

  • Artikel

Associated

  • Erkilet, Gülcan
  • Janke, Gerrit
  • Kasperzak, Rainer
  • Springer

Time of origin

  • 2021

Other Objects (12)