How valuation approach choice affects financial analysts’ target price accuracy

Gülcan Erkilet (), Gerrit Janke () and Rainer Kasperzak ()
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Gülcan Erkilet: University of Duisburg-Essen
Gerrit Janke: Credit Suisse AG
Rainer Kasperzak: University of Duisburg-Essen

Journal of Business Economics, 2022, vol. 92, issue 5, No 2, 779 pages

Abstract: Abstract This paper examines which valuation approaches financial analysts use to value a company and whether the chosen valuation approach affects the target price accuracy. To address these questions, we conduct content analyses of 867 hand-collected analyst reports on German publicly listed companies published between January 2014 and June 2017. We find that sell-side analysts more frequently use the single-period market approach when formulating target prices, followed by the multi-period income approach, and a mixture of both by combining the results, the so-called hybrid valuation approach. Additionally, we show that 612 of the analyzed analyst reports are based on a holistic valuation methodology instead of a sum of the parts valuation technique. Both univariate and multivariate analyses emphasize that the choice of valuation approach is significantly associated with the accuracy of price targets. Specifically, the income and market approach lead to significantly more accurate target prices compared to the hybrid approach. We also find that the target price accuracy is higher when analysts apply the holistic rather than the sum of the parts valuation approach to determine the fundamental value of the company. Additional results emphasize that target price accuracy improves when analysts use the sum of the parts valuation that bases solely on market or income approaches rather than hybrid approaches. Hence, we contribute to theory and practice by providing evidence on the link between the choice of valuation approach and the analysts’ target price accuracy as well as on the performance of certain valuation techniques.

Keywords: Target prices; Analyst reports; Financial analysts; Valuation methods; Sum of the parts (search for similar items in EconPapers)
JEL-codes: G11 G12 G17 G24 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s11573-021-01061-w

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