Equity valuation models and target price accuracy in Europe: Evidence from equity reports

Shahed Imam, Jacky Chan, Syed Zulfiqar Ali Shah

Research output: Contribution to journalArticlepeer-review

18 Citations (Scopus)

Abstract

This study examines whether European investment analysts prefer cash flow based valuation models over accrual based models, how accurate valuation models are and whether the use of cash flow based models (with or without accrual based models) improve forecast accuracy. We conduct a comprehensive content analysis of equity research reports for most of the firms on the components list of the Dow Jones Euro Stoxx 50 Index. We find that earnings multiples and the discounted cash flow (DCF) valuation models are the two most popular valuation models and the use of accrual based multiple alongside a cash flow based model improves the forecast error and this is in line with the intuition that accruals add value relevant information to cash flows. However, we also find that neither cash flow nor earnings multiples are superior to book value and return on equity (ROE) based models in terms of forecast error. Our results provide support for the use of book value and ROE based models which provide more precise forecasts and this, in turn, supports the use of accounting based models, i.e., a residual income model.

Original languageEnglish
Pages (from-to)9-19
Number of pages11
JournalInternational Review of Financial Analysis
Volume28
Early online date26 Feb 2013
DOIs
Publication statusPublished - 1 Jun 2013
Externally publishedYes

Fingerprint

Dive into the research topics of 'Equity valuation models and target price accuracy in Europe: Evidence from equity reports'. Together they form a unique fingerprint.

Cite this