Toward the Development of Client-Specified Valuation Models

Abstract

Because of the scope of the study, it is not possible to make general statements about the exact variables which should be used in client-specified valuation models. However, the interpretation of the results of the study suggests several tentative conclusions.

First, the investor's investment analysis of common stock appears to be a multi-dimensional process. That is, more than one decision variable is involved in the analysis. Hence, it may be reasoned that client-specified valuation models should involve several independent variables.

Second, the dividends factor is the most important of the three factors identified through factor analysis. This finding suggests large differences in perceptions among investors concerning the importance of dividends.

Third, future expectations and financial stability are the other factors identified through factor analysis. These factors also represent areas of large perceptual differences among investors concerning their importance.

Finally, investors are of two distinct types: those who seek dividends and those who seek capital appreciation. This finding provides a partial explanation for the inability of researchers using traditional methodology to predict a firm's stock price behavior. Thus, investors do not comprise a single homogeneous class. This suggests that certain types of stocks prove attractive to particular types of investors, i.e., a "clientele effect." Hence, it is recommended that researchers interested in share price research segment the market by class of investor. Such investigation of investor socioeconomic and behavioral characteristics should prove worthwhile in providing a greater understanding of the factors influencing investor behavior.