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SUMMARY:Errors and questionable judgments in analysts’ DCF models  - Pro
 fessor John Hand\, H. Allen Andrew Distinguished Professor\, UNC Chapel Hi
 ll\, USA
DTSTART:20150713T093000Z
DTEND:20150713T110000Z
UID:TALK60122@talks.cam.ac.uk
CONTACT:Crystal
DESCRIPTION:*Biography:*\n\nJohn R. M. Hand is the H. Allen Andrew Disting
 uished Professor at UNC Kenan-Flagler. With wide ranging interests in acco
 unting\, entrepreneurship and finance\, \, Dr. Hand’s current research f
 ocuses on equity analysts’ financial statement forecasts and valuation m
 odels\, the identities and economic importance of multidimensional stock r
 eturn predictive signals\, and what hedge funds tell their investors. He i
 s co-author of "Intangible Assets: Values\, Measures and Risks" (Oxford Un
 iversity Press\, 2003) with Baruch Lev of New York University.\n\n\n*Abstr
 act*\n\nWe investigate the number of and reasons for errors and questionab
 le judgments that sell-side equity analysts make in constructing and execu
 ting DCF equity valuation models. For a sample of 120 DCF models detailed 
 in reports issued by U.S. brokers in 2012 and 2013\, we estimate that anal
 ysts make a median of three theoretic or execution errors and four questio
 nable economic judgments per DCF. Recalculating analysts‘ DCFs after cor
 recting for major errors changes analysts‘ mean valuations and target pr
 ices by between -2% and 14% per error. Based on a combination of regressio
 n analysis and face-to-face interviews with analysts and those who oversee
  them\, we conclude that analysts‘ DCF modelling behavior is semi-sophis
 ticated in that analysts both genuinely make mistakes regarding certain as
 pects of correctly valuing equity\, but also respond rationally to the inc
 entives they face\, particularly that they are not directly compensated fo
 r being textbook DCF correct.
LOCATION:Cambidge Judge Business School\,  Lecture Theatre 2
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