Can Analysts Assess Fundamental Risk and Valuation Uncertainty? An Empirical Analysis of Scenario-Based Value Estimates
45 Pages Posted: 1 Feb 2016
Date Written: October 19, 2015
We use a dataset of sell-side analysts' scenario-based equity valuation estimates to examine whether analysts can assess the state-contingent risk surrounding a firm's fundamental value. We find that the spread in analysts' scenario-based valuations captures the riskiness of operations and predicts the absolute magnitude of long-run valuation errors and future changes in firm fundamentals. We also show that analysts' assessment of fundamental risk and its predictive ability systematically improved after the financial crisis, consistent with the macroeconomic shock raising analysts' awareness of firms' systematic risk exposures.
Keywords: Analysts; Fundamental Risk Assessment; Scenario-based Valuations; Target Prices
JEL Classification: G24, G11, G01
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