Analysts’ Book Value Forecasts: Initial Evidence from the Perspective of Real-Options-Based Valuation

Posted: 5 May 2022

See all articles by Kai Wai Hui

Kai Wai Hui

University of Hong Kong

Alfred Z. Liu

McMaster University

Jr, Richard Schneible

Grand Valley State University

Guochang Zhang

University of Hong Kong

Date Written: April 20, 2022

Abstract

This study examines the usefulness of analysts’ book value forecasts and the economic factors driving analysts’ issuance of these forecasts. Guided by the real-options-based valuation model (ROM) of Zhang (2000), we explicitly link book value forecasts to the need for such information in valuation. We first establish that analysts’ book value forecasts are superior to forecasts that are mechanically imputed from analysts’ own earnings forecasts and those from random walk models and are incrementally informative beyond analysts’ earnings, cash flow, and dividend forecasts. We then employ the ROM to explore the distinct information embedded in book value forecasts and analysts’ decisions to issue these forecasts. Consistent with our expectations, we find that (i) book value forecasts convey growth information that is significantly correlated with ex ante indicators of real options, while analysts’ earnings forecasts do not display this property and (ii) analysts issue more book value forecasts when either growth options or, to a lesser extent, abandonment options are an important part of firm value. Our study sheds light on how analysts’ book value forecasts are useful and under what circumstances analysts provide such information to meet investors’ needs.

Keywords: analyst forecasts, book value, equity valuation, real options

Suggested Citation

Hui, Kai Wai and Liu, Alfred and Schneible, Jr, Richard and Zhang, Guochang, Analysts’ Book Value Forecasts: Initial Evidence from the Perspective of Real-Options-Based Valuation (April 20, 2022). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4094416

Kai Wai Hui (Contact Author)

University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam
Hong Kong

Alfred Liu

McMaster University ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

Jr, Richard Schneible

Grand Valley State University ( email )

1 Campus Dr.
Allendale, MI 49401-9403
United States

Guochang Zhang

University of Hong Kong ( email )

KK Leung Building
Faculty of Business and Economics
Hong Kong
+852 3917 1076 (Phone)

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