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

45 Pages Posted: 1 Feb 2016

See all articles by Peter R. Joos

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: October 19, 2015

Abstract

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

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 (October 19, 2015). Journal of Financial Economics (JFE), Forthcoming; Stanford University Graduate School of Business Research Paper No. 16-13. Available at SSRN: https://ssrn.com/abstract=2725139

Peter R. Joos

INSEAD ( email )

1 Ayer Rajah Avenue
Singapore, 138676
Singapore

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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