Use Of Valuation Models Research Articles

Industry-specific stock valuation methods – a literature review

PurposeSurprisingly little is known of the various methods of security analysis used by financial analysts with industry-specific knowledge. Financial analysts’ industry knowledge is a favored and appreciated attribute by fund managers and institutional investors. Understanding analysts’ use of industry-specific valuation models, which are the main value drivers within different industries, will enhance our understanding of important aspects of value creation in these industries. This paper contributes to the broader understanding of how financial analysts in various industries approach valuation, offering insights that can be beneficial to a wide range of stakeholders in the financial market.Design/methodology/approachThis paper systematically reviews existing research to consolidate the current understanding of analysts’ use of valuation models and factors. It aims to demystify what can often be seen as a “black box”, shedding light on the valuation tools employed by financial analysts across diverse industries.FindingsThe use of industry-specific valuation models and factors by analysts is a subject of considerable interest to both academics and investors. The predominant model in several industries is P/E, with some exceptions. Notably, EV/EBITDA is favored in the telecom, energy and materials sectors, while the capital goods industry primarily relies on P/CF. In the REITs sector, P/AFFO is the most commonly employed model. In specific sectors like pharmaceuticals, energy and telecom, DCF is utilized. However, theoretical models like RIM and AEG find limited use among analysts.Originality/valueThis is the first paper systematically reviewing the research on analyst’s use of industry-specific stock valuation methods. It serves as a foundation for future research in this field and is likely to be of interest to academics, analysts, fund managers and investors.

Identifying gaps between research results and education

Although research results can enhance the content of education programs at various university levels, many important research results are only partly covered in major university-level textbooks. It is more difficult to transfer contributions from research results to practitioners if the former is not part of regular education programs. Here, we identify areas where researchers and educators can bridge the gap between theory and research results based on empirical studies, allowing findings to be more easily implemented by practitioners in situations that can improve their output. We take the use and accuracy of security and financial statement analysis as our prime target to examine empirical research results. Financial statement analysis and security valuation are two important applications in accounting and finance, and it is possible to measure changes in the models’ parameters and the effect these have on the outcome. We focus on five aspects of security and financial statement analysis: analysts’ use of valuation models, their estimates and accuracy, peer selection using multiples, valuation models target price accuracy, and differences in industry-specific valuation models and valuation factors. We find that most of the important research results are not referenced in major financial accounting textbooks.

A research and technology valuation model for decision analysis in the environmental and renewable energy sectors

Annually, companies invest vast amounts of resources into research and development (R&D) in order to remain competitive in today's markets. This investment intensive effort needs to be carefully managed and monitored in order to make the most of these investments. Making informed decisions regarding resource allocation is vital for maximizing return on investment (ROI). One important way to achieve this is use of a valuation model that is capable of estimating the potential return of R&D investment by assessing among other parameters, the level of uncertainty and risk associated with this kind of project. This paper presents a valuation decision model that has been applied to the renewable and environmental sector. Here we present a flexible, user-friendly and understandable model that reflects the intrinsic risks associated with R&D projects. The model can be customized for use across a variety of capital intensive and medium-long term R&D projects in the private and public realms. A real-life case study is used to illustrate the utility of the model within the biofuel sector; specifically, for a project focused on the production of biofuel from municipal solid waste. Use of valuation models, such as the one described here, when used from the very initial phases of the project till project completion can serve a vital role in R&D management—one that enables decision-makers to define realistic and productive targets throughout the full R&D project period.

Avaliação Bibliométrica de Periódicos Brasileiros: Contrastando a Metodologia Avaliativa Qualis-CAPES com o Modelo de Krzyzanowski e Ferreira (1998)

DOI: 10.5902/198346595488 This paper aims at analyzing and contrasting the bibliometric forms of five renowned national journals. The theoretical discourses on the use of valuation models, with emphasis on the Krzyzanowski and Ferreira (1998) and the methodology used in the assessment of the Coordination of Improvement of Higher Education Personnel (CAPES, in portuguese) (2007-2009). The period considered was the triennium 2007 to 2009, intentionally coinciding with the evaluation period of Qualis-CAPES. The results suggest that external validation of the classifications of journals made by Qualis CAPES for another "metric" consecrated - Krzyzanowski and Ferreira (1998), and an apparent improvement of the journals studied in the question form for the period surveyed. Another finding on this question it is found that some characteristics of the periodic recurrence, the journals “Revista Contabilidade Finanças” (Faculty of Economics, Business, and Accounting-University of São Paulo), “Revista de Administração Pública” (Getúlio Vargas Foundation) and “Revista de Contabilidade Vista Revista” (Federal University of Minas Gerais), as the apparent inbreeding, the result of a substantial concentration of researchers working at universities south-southeast of Brazil.

ANALYSIS OF THE RESIDUAL INCOME VALUATION AND ABNORMAL EARNINGS GROWTH MODELS: A PRACTICAL APPROACH USING ANALYSTS’ FORECASTS

This paper revisits two valuation models based on accounting figures: the Residual Income Valuation (RIV) and Abnormal Earnings Growth (AEG). Our research design has two approaches: i) we demonstrate theoretical integration of both models; and ii) we show in a practical manner that models converge to the same results based on real data of analysts forecast consensus. We apply statistical tests on empirical data from analyst’s forecasts available on Thomson One Analytics database. We use information of 45 firms listed on the IBovespa segment from BMF&BOVESPA in 2008 with historical data from 2003 to 2007 and analysts’ projections from 2003 to 2010. Our results do not show a significant mean difference of the valuations, but those from the RIV model are more dispersed than those produced by the AEG model. Furthermore, our results are consistent with international evidences and present additional evidences of application of valuation models based on accounting information in Brazil. Our findings support the use of valuation models based on accounting figures by analysts, investors, rating agencies and regulators to provide additional analyses of firm’s future prospects.

The use of financial information by private equity funds in evaluating new investments

PurposeThe purpose of this paper is to examine the use of financial information and valuation methods among private equity funds in Europe and India. The authors analyze differences in the choice of valuation methods and how the use of financial information differs among funds in the UK, Pan Europe and India.Design/methodology/approachA survey approach was utilized in collecting proprietary data from European and Indian private equity funds. The data were classified according to fund type, country grouping, size, risk profile, labor cost and industry structure and analyzed using MANOVA and ANOVA.FindingsThe results show that the use of valuation models is relatively homogeneous across countries and that the use of financial information appears to be driven to a large extent by fund type and fund focus. The use of audited financial statements appears to increase as firms mature. Significant differences were found in standard financial adjustments between the two fund types and between the country groupings. Results based on labor cost are weakly significant whereas industry structure does not appear to have an impact on how fund managers evaluate investments.Research limitations/implicationsThe results indicate that fund managers adapt their decision‐making behavior according to investment type and risk. The authors argue that understanding asymmetrical and structural issues may potentially improve investment decision‐making processes. The main conclusion for researchers is that buy‐out and venture capital funds should not be combined as one asset class. Since a survey approach was used, the study is subject to the belief that fund managers do not internalize decisions well, which could reduce the effectiveness of the research design.Originality/valueThere are few studies in the areas covered by this paper due to the proprietary nature of the private equity industry. The results are important because they help in understanding how fund managers use decision aids such as financial statements and valuation techniques. A better understanding of current practices will help fund managers and fund sponsors in devising improved decision aids and processes, which ultimately may lead to fewer non‐performing investments. This is especially important in private equity since investment decisions are often irreversible and binary.

Value relevance of advertising expenditure: A review of the literature

This paper presents a review of the relevant empirical literature on advertising value relevance. The current dominant accounting practice is to treat advertising as a current period expense. There has been growing evidence, however, to suggest that advertising should be viewed as an investment in long‐term brand equity. While the primary focus is on the valuation studies of advertising expenditure, the paper also provides an overview of various other studies that relate advertising to profitability or sales of the firm or industry to investigate the effects of advertising expenditure. As a consequence, it is emphasized that there has been a recent shift to the use of valuation models in exploring the nature of advertising expenditure. Since market value captures both the current and future profitability effects of advertising, valuation models are often seen as a better alternative in exploring the intangible nature of advertising expenditure. It is found that the bulk of evidence on advertising value relevance comes from the US, where there has historically been greater disclosure of advertising expenditure. There appears to be little evidence on this matter in the UK, however. This may largely be attributed to the lack of advertising data availability in the UK.

The Use of Valuation Models by UK Investment Analysts

This paper examines the use of valuation models by UK investment analysts. The study is based on, first, semi-structured interviews with 35 sell-side analysts from 10 leading investment banks and with 7 buy-side analysts from 3 asset management firms and, second, content analysis based on 98 equity research reports for FTSE-100 companies covered by the sell-side interviewees. We observe that analysts perceive the discounted cash flow (DCF) (and to some extent ‘sophisticated’ models in general) to have become significantly more important than prior survey evidence suggests, although we also find the (somewhat paradoxical) continued importance of ‘unsophisticated’ valuation multiples, notably the price/earnings ratio (PE). We find perceived limitations in the technical applicability of the DCF, which cause analysts to rely in practice upon valuation multiples and subjective judgement of whether the market price ‘feels right’. We also find that contextual factors, notably the analysts' need for their research to be credible to buy-side clients, cause the use of subjective, unsophisticated methods of valuation to be played down. Given the inherent flexibility of the DCF model, coupled with its ostensible credibility, it becomes the natural vehicle for conveying the analyst's research, even though it is very rarely relied upon to determine target prices and investment recommendations. We conclude that, while the literature has focused on the technical merits of alternative valuation models, analysts' actual usage of valuation models also requires an understanding of social and economic context and motivations.

Influences on the value relevance of equity and net income in the UK

Discusses the increasing use of valuation models in accounting and finance research, identifies potential difficulties in the conventional model and develops a simple version (which can deal with negative earnings) of the Edwards, Bell and Ohlson model, estimated from 1987‐1997 UK data. Finds it sensitive to firm size, dividend policy and return on equity; but not to capital structure. Compares consistency with other research and considers the underlying reasons for the results.

Real Estate Valuation Models: Lender and Equity Investor Criteria

The use of valuation models that focus on lender criteria has been growing in the appraisal field. In the rush to build lender criteria into real estate valuation models, equity investor criteria, expectations, and requirements occasionally have been ignored. The specific criteria considered in this paper are the loan‐to‐value ratio and the debt coverage ratio for lenders and the equity dividend rate for equity investors. Each of these three criteria may be a binding constraint on value.Graphical analysis provides a framework within which major real estate valuation models (i.e., Ellwood, McLaughlin, Gettel, Lusht‐Zerbst, and Steele) are compared. A new valuation model (i.e., the Cannaday‐Colwell model) is developed which utilizes the equity dividend rate.The three definitional models (i.e., McLaughlin, Gettel, and Steele) are found to be relevant only by mere coincidence. Each of these models simultaneously considers two of the three key criteria, completely eliminating the possibility of consideration of anything else; i.e., the models become tautological.It is shown that the discounted cash flow based models (i.e., Ellwood, Lusht‐Zerbst, and Cannaday‐Colwell) each tell one‐third of the story. One of these models will be relevant depending upon whether the binding constraint is the maximum loan‐to‐value ratio, the minimum debt coverage ratio, or the minimum equity dividend rate. The relevant model is the one that yields the lowest value estimate of the three.