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

49 Pages Posted: 20 Oct 2012 Last revised: 8 Oct 2013

Peter R. Joos

INSEAD

Joseph D. Piotroski

Stanford Graduate School of Business

Suraj Srinivasan

Harvard Business School

Multiple version iconThere are 2 versions of this paper

Date Written: September 19, 2012

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.

Keywords: Valuation, Analyst Forecasts, Scenarios, Uncertainty

JEL Classification: G13, G24, G30, M41

Suggested Citation

Joos, Peter R. and Piotroski, Joseph D. and Srinivasan, Suraj, Can Analysts Assess Fundamental Risk and Valuation Uncertainty? An Empirical Analysis of Scenario-Based Value Estimates (September 19, 2012). Available at SSRN: https://ssrn.com/abstract=2164379 or http://dx.doi.org/10.2139/ssrn.2164379

Peter R. Joos

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

Joseph D. Piotroski

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Suraj Srinivasan (Contact Author)

Harvard Business School ( email )

Soldiers Field
Boston, MA 02163
United States

HOME PAGE: http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=pub&facId=10700

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