What Valuation Models Do Analysts Use?

Accounting Horizons, 18 (4), pp. 221-240, 2004

Posted: 12 Nov 2019

See all articles by Efthimios Demirakos

Efthimios Demirakos

Athens University of Economics and Business - Department of Accounting and Finance

Norman C. Strong

University of Manchester - Alliance Manchester Business School

Martin Walker

University of Manchester - Manchester Business School

Date Written: December 31, 2004

Abstract

This paper adopts a structured positive approach to explaining the valuation practices of financial analysts by studying the valuation methodologies contained in 104 analysts' reports from international investment banks for 26 large U.K.-listed companies drawn from the beverages, electronics, and pharmaceuticals sectors. We provide a descriptive analysis of the use of alternative valuation models focusing on the value-relevant attributes that analysts seek to forecast and the methodologies analysts use to convert the forecasts into estimates of firm value. We postulate and test a number of hypotheses relating to how the valuation practices of analysts vary systematically across industrial sectors. We find that: (1) the use of valuation by comparatives is higher in the beverages sector than in electronics or pharmaceuticals; (2) analysts typically choose either a PE model or an explicit multi-period DCF valuation model as their dominant valuation model; (3) none of the analysts use the price to cash flow as their dominant valuation model; and (4) contrary to our expectations, some analysts who construct explicit multi-period valuation models still adopt a comparative valuation model as their preferred model. We believe the study's findings are important for increasing our understanding of the valuation practices of financial analysts. The study also provides a basis for further research that tests a richer and more detailed set of hypotheses.

JEL Classification: G32, M41

Suggested Citation

Demirakos, Efthimios and Strong, Norman Charles and Walker, Martin, What Valuation Models Do Analysts Use? (December 31, 2004). Accounting Horizons, 18 (4), pp. 221-240, 2004. Available at SSRN: https://ssrn.com/abstract=3479656

Efthimios Demirakos (Contact Author)

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece

HOME PAGE: http://www.aueb.gr/en/faculty_page/demirakos-efthimios

Norman Charles Strong

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Martin Walker

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Abstract Views
70
PlumX Metrics