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
Date Written: September 19, 2012
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
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