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Review of Accounting Studies

Erschienen in:

07.05.2022

Valuation uncertainty and analysts’ use of DCF models

verfasst von: Shengzhong Huang, Hongping Tan, Xiongyuan Wang, Changqiu Yu

Erschienen in: Review of Accounting Studies | Ausgabe 2/2023

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Abstract

Using textual analysis for a large sample of analyst reports on U.S. firms, we find that analysts are more likely to use a discounted cash flow (DCF) model and to discuss more cash flow and discount rate information for firms with more uncertainty, as measured by earnings quality and firm risks. The market reactions to target price changes based on a DCF model are stronger, particularly for firms with greater valuation uncertainty and when the analysts present more cash flow and discount rate discussions. These results indicate that the analyst valuation process reflects investors’ information demand under uncertainty and has a bearing on the informativeness of analyst research.

Vorheriger Artikel Other comprehensive income, its components, and analysts’ forecasts

Nächster Artikel SEC comment letters on form S-4 and M&A accounting quality

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The use of a DCF model increases from 2% to more than 10% during the same period and keeps increasing to around 30% by the end of 2002.

See Bradshaw (2004) and Barniv et al. (2009, 2010).

See Gleason et al. (2013) and Hand et al. (2017).

In this study, we use price-to-earnings to indicate a broad definition of earnings-based multiples which include entity-level measures, such as EV/EBIT and EV/EBTDA.

Of the 90% of reports that disclose any valuation models during our sample period, 98% and 38% of the reports mention a price-to-earnings model and a DCF model, respectively. Our main findings are qualitatively unchanged if we define the use of a DCF model as simply being mentioned in an analyst report.

By “valuation uncertainty,” we mean analysts’ perceived uncertainty about the underlying firm’s fundamentals. In practice, “risk” and “uncertainty” go together (Miller 1977). We do not make a clear distinction between “risk” and “uncertainty,” because they are hard to empirically disentangle, as observed empirical constructs might capture both effects. For instance, Joos et al. (2016) use the difference in target price forecasts in bull and bear scenarios to capture analysts’ recognition of the underlying firm’s risk and uncertainty.

See, for example, Campbell and Ammer (1993), Campbell and Shiller (1988), Campbell and Vuolteenaho (2004), Chen and Zhao (2009), and Bansal and Yaron (2004).

See the example in Appendix 1.

We observe a similar increasing trend of firms valued with a DCF model (an increase from 6% in 1997 to more than 50% in recent years) and analysts using a DCF model (an increase from 11% in 1997 to more than 50% in recent years).

In addition to a short window of marker reaction, we also include a half-year window to test the informativeness of the analyst report, because the investment period of an analyst’s forecast is usually six to 12 months.

Our findings in the subsample tests are qualitatively unchanged if we use CAR183 as the dependent variables.

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Titel: Valuation uncertainty and analysts’ use of DCF models
verfasst von: Shengzhong Huang
Hongping Tan
Xiongyuan Wang
Changqiu Yu
Publikationsdatum: 07.05.2022
Verlag: Springer US
Erschienen in: Review of Accounting Studies / Ausgabe 2/2023
Print ISSN: 1380-6653
Elektronische ISSN: 1573-7136
DOI: https://doi.org/10.1007/s11142-021-09658-w

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