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Financial Analysts' Forecast Accuracy: Do valuation methods matter?

Elisa Cavezzali () and Ugo Rigoni
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Elisa Cavezzali: Università Ca' Foscari Venice

No 9, Working Papers from Department of Management, Università Ca' Foscari Venezia

Abstract: This study investigates how different ways to evaluate a company influence the accuracy of the target price. We know that finance theory and professional practice propose alternative approaches to the evaluation of a company. The literature on the relationship between the valuation methods used and target price accuracy is still scant, and the results are inconclusive and contradictory. Coding the valuation methods of 1,650 reports, we find that the accuracy of target prices decreases when the target price is based just on a main method. Furthermore, we show that methods based on company fundamentals and those based on market multiples lead to similar levels of accuracy. Among different classes of methods, there are no superior methods. Therefore, we argue that in order to improve forecast accuracy, analysts need to assess company value by choosing and applying a set of different methods, combining them and getting the average value, but regardless of the specific technique chosen.

Keywords: forecast accuracy; sell-side analysts; equity valuation; valuation methods (search for similar items in EconPapers)
JEL-codes: M40 M41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for and nep-mst
Date: 2013-08
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http://virgo.unive.it/wpideas/storage/2013wp9.pdf First version, 2013 (application/pdf)

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