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The Use of Valuation Models by Investment Analysts
Shahed Imam,
University of Warwick
Richard Barker, University of Cambridge
Colin Clubb, University of Warwick
ABSTRACT. This paper examines the use of valuation models by investment analysts. The study is based on, first, semi-structured interviews with 35 sell-side analysts from 10 leading investment banks, 7 with buy-side analysts from three asset management firms and, second, content analysis based on 98 equity research reports for FTSE-100 companies covered by the interviewees (i.e. sell-side analysts). In contrast to most of the earlier studies, the study suggests that analysts use sophisticated valuation models like multi-period discounted cash flow model in a majority of cases. Moreover, analysts’ valuation model preferences are multi-dimensional, i.e. more than one factor is involved in their rationales for using a valuation model (s). The activities with fund managers to fund research create strong incentives for analysts to focus on some specific models.
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