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Valuation uncertainty and analysts’ use of DCF models

Author

Listed:
  • Shengzhong Huang

    (China University of Mining and Technology-Beijing)

  • Hongping Tan

    (McGill University)

  • Xiongyuan Wang

    (Zhongnan University of Economics and Law)

  • Changqiu Yu

    (University of Manitoba)

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.

Suggested Citation

  • Shengzhong Huang & Hongping Tan & Xiongyuan Wang & Changqiu Yu, 2023. "Valuation uncertainty and analysts’ use of DCF models," Review of Accounting Studies, Springer, vol. 28(2), pages 827-861, June.
    • Handle: RePEc:spr:reaccs:v:28:y:2023:i:2:d:10.1007_s11142-021-09658-w
    DOI: 10.1007/s11142-021-09658-w
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    More about this item

    Keywords

    Uncertainty; Analysts; Investor demand; Valuation; Discounted cash flow (DCF); Cash flow; Discount rate; Textual analysis;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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