Can Analysts Assess Fundamental Risk and Valuation Uncertainty? An Empirical Analysis of Scenario-Based Value Estimates

Abstract:     
We use a dataset of sell-side analysts' scenario-based valuation estimates to examine whether analysts reliably assess the risk surrounding a firm’s fundamental value. We find that the spread in analysts’ state-contingent valuations captures the riskiness of operations and predicts the absolute magnitude of future long-run valuation errors and changes in firm fundamentals. Similarly, asymmetry embedded in the analysts’ scenario-based valuations conveys information about asymmetric risk-reward exposure and predicts skewness in future long-run valuation errors; however, embedded asymmetry is not correlated with changes in fundamentals. The results confirm that analysts’ valuations reflect both state-contingent risk assessments and non-fundamental factors.

Number of Pages in PDF File: 49

Keywords: Valuation, Analyst Forecasts, Scenarios, Uncertainty

JEL Classification: G13, G24, G30, M41

working papers series