Does Valuation Model Choice Affect Target Price Accuracy?

50 Pages Posted: 1 Apr 2009

See all articles by Efthimios Demirakos

Efthimios Demirakos

Athens University of Economics and Business - Department of Accounting and Finance

Norman C. Strong

University of Manchester - Alliance Manchester Business School

Martin Walker

University of Manchester - Manchester Business School

Date Written: March 31, 2009

Abstract

We investigate whether the choice of valuation model affects the forecast accuracy of the target prices that investment analysts issue in their equity research reports, controlling for factors that influence this choice. We examine 490 equity research reports from international investment houses for 94 UK-listed firms published over the period 07/2002-06/2004. We use four measures of accuracy: (i) whether the target price is met during the 12-month forecast horizon (met_in); (ii) whether the target price is met on the last day of the 12-month forecast horizon (met_end); (iii) the absolute forecast error (abs_err); and (iv) the forecast error of target prices that are not met at the end of the 12-month forecast horizon (miss_err). Based on met_in and abs_err, price-to-earnings (PE) outperform DCF models, while based on met_end and miss_err the difference in valuation model performance is insignificant. However, after controlling for variables that capture the difficulty of the valuation task, the performance of DCF models improves in all specifications and, based on miss_err, they outperform PE models. These findings are robust to standard controls for selection bias.

Keywords: Equity valuation, investment analysts, target price accuracy, valuation model choice

JEL Classification: C25, G11, G24, M41

Suggested Citation

Demirakos, Efthimios and Strong, Norman Charles and Walker, Martin, Does Valuation Model Choice Affect Target Price Accuracy? (March 31, 2009). European Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1370847

Efthimios Demirakos

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece

HOME PAGE: http://https://www.aueb.gr/en/faculty_page/demirakos-efthimios

Norman Charles Strong (Contact Author)

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Martin Walker

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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