Resolving Estimation Ambiguity

Paul H. Decaire, Denis Sosyura and Michael D. Wittry
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Paul H. Decaire: Arizona State U
Denis Sosyura: Arizona State U
Michael D. Wittry: Ohio State U

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: Economic models develop conceptual frameworks for fundamental decisions but rarely prescribe a specific estimation approach. Using novel data on the inputs and assumptions in professional stock valuations, we study how financial analysts address estimation ambiguity when calculating a firm’s cost of capital. Analysts use the same return-generating model (CAPM) but diverge in their estimation choices for key inputs, such as equity betas. Such estimation choices are driven by idiosyncratic analyst specific criteria, persist throughout their career and across brokerages, and generate large cross-analyst variation in discount rates for the same stock. The dispersion in discount rates is associated with higher market measures of investor disagreement, such as trading volume. Overall, we provide micro evidence on how financial experts resolve estimation uncertainty.

JEL-codes: D25 D82 D83 G30 G31 G41 O13 Q15 R14 (search for similar items in EconPapers)
Date: 2024-09
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2024-19

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