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  • Yin, Peasnell and Hunt ABR Analyst PE June 2016

    Rights statement: This is an Accepted Manuscript of an article published by Taylor & Francis in Accounting and Business Research on 16/11/2016, available online: http://www.tandfonline.com/10.1080/00014788.2016.1230486

    Accepted author manuscript, 446 KB, PDF document

    Available under license: CC BY-NC: Creative Commons Attribution-NonCommercial 4.0 International License

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How do sell-side analysts obtain price-earnings multiples to value firms?

Research output: Contribution to journalJournal articlepeer-review

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How do sell-side analysts obtain price-earnings multiples to value firms? / Yin, Yuan; Peasnell, Kenneth Vincent; Hunt, Herbert G.

In: Accounting and Business Research, Vol. 48, No. 1, 01.2018, p. 108-135.

Research output: Contribution to journalJournal articlepeer-review

Harvard

Yin, Y, Peasnell, KV & Hunt, HG 2018, 'How do sell-side analysts obtain price-earnings multiples to value firms?', Accounting and Business Research, vol. 48, no. 1, pp. 108-135. https://doi.org/10.1080/00014788.2016.1230486

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Author

Yin, Yuan ; Peasnell, Kenneth Vincent ; Hunt, Herbert G. / How do sell-side analysts obtain price-earnings multiples to value firms?. In: Accounting and Business Research. 2018 ; Vol. 48, No. 1. pp. 108-135.

Bibtex

@article{27f8ea5b42ef485799fe79165f84dfb4,
title = "How do sell-side analysts obtain price-earnings multiples to value firms?",
abstract = "Previous studies of analysts{\textquoteright} valuation methods show that sell-side analysts often rely on multiples-based relative valuation methods in deriving target price forecasts, predominantly earnings-based multiples. However, little is known about how analysts actually arrive at the earnings multiples that they apply in their valuations. Based on extant valuation theory, we analyse three benchmarks/reference points that analysts use to select these multiples using U.S. data. By mimicking analysts{\textquoteright} relative valuation processes, we show that analysts tend to assign earnings multiple premiums (discounts) to those firms expected to have growth premiums (higher risk levels) relative to comparable firms. We provide evidence that analysts use firms{\textquoteright} historical earnings multiples as benchmarks, and assign firms that are expected to have more (less) attractive fundamentals than they have had in the past earnings multiples that are at a premium (discount) relative to the average historical earnings multiples at which they traded. The forward P/E multiple for the broad U.S. market index signals the market{\textquoteright}s expectations about the growth prospects of the U.S. economy and future economic conditions and we also find that changes in this multiple affect analysts{\textquoteright} choices of firm-specific earnings multiples.",
keywords = "Relative valuation, analyst target P/E multiple, P/E multiple premium, growth and risk premiums, deviation from long-run average",
author = "Yuan Yin and Peasnell, {Kenneth Vincent} and Hunt, {Herbert G.}",
note = "This is an Accepted Manuscript of an article published by Taylor & Francis in Accounting and Business Research on 16/11/2016, available online: http://www.tandfonline.com/10.1080/00014788.2016.1230486",
year = "2018",
month = jan,
doi = "10.1080/00014788.2016.1230486",
language = "English",
volume = "48",
pages = "108--135",
journal = "Accounting and Business Research",
issn = "0001-4788",
publisher = "Routledge",
number = "1",

}

RIS

TY - JOUR

T1 - How do sell-side analysts obtain price-earnings multiples to value firms?

AU - Yin, Yuan

AU - Peasnell, Kenneth Vincent

AU - Hunt, Herbert G.

N1 - This is an Accepted Manuscript of an article published by Taylor & Francis in Accounting and Business Research on 16/11/2016, available online: http://www.tandfonline.com/10.1080/00014788.2016.1230486

PY - 2018/1

Y1 - 2018/1

N2 - Previous studies of analysts’ valuation methods show that sell-side analysts often rely on multiples-based relative valuation methods in deriving target price forecasts, predominantly earnings-based multiples. However, little is known about how analysts actually arrive at the earnings multiples that they apply in their valuations. Based on extant valuation theory, we analyse three benchmarks/reference points that analysts use to select these multiples using U.S. data. By mimicking analysts’ relative valuation processes, we show that analysts tend to assign earnings multiple premiums (discounts) to those firms expected to have growth premiums (higher risk levels) relative to comparable firms. We provide evidence that analysts use firms’ historical earnings multiples as benchmarks, and assign firms that are expected to have more (less) attractive fundamentals than they have had in the past earnings multiples that are at a premium (discount) relative to the average historical earnings multiples at which they traded. The forward P/E multiple for the broad U.S. market index signals the market’s expectations about the growth prospects of the U.S. economy and future economic conditions and we also find that changes in this multiple affect analysts’ choices of firm-specific earnings multiples.

AB - Previous studies of analysts’ valuation methods show that sell-side analysts often rely on multiples-based relative valuation methods in deriving target price forecasts, predominantly earnings-based multiples. However, little is known about how analysts actually arrive at the earnings multiples that they apply in their valuations. Based on extant valuation theory, we analyse three benchmarks/reference points that analysts use to select these multiples using U.S. data. By mimicking analysts’ relative valuation processes, we show that analysts tend to assign earnings multiple premiums (discounts) to those firms expected to have growth premiums (higher risk levels) relative to comparable firms. We provide evidence that analysts use firms’ historical earnings multiples as benchmarks, and assign firms that are expected to have more (less) attractive fundamentals than they have had in the past earnings multiples that are at a premium (discount) relative to the average historical earnings multiples at which they traded. The forward P/E multiple for the broad U.S. market index signals the market’s expectations about the growth prospects of the U.S. economy and future economic conditions and we also find that changes in this multiple affect analysts’ choices of firm-specific earnings multiples.

KW - Relative valuation

KW - analyst target P/E multiple

KW - P/E multiple premium

KW - growth and risk premiums

KW - deviation from long-run average

U2 - 10.1080/00014788.2016.1230486

DO - 10.1080/00014788.2016.1230486

M3 - Journal article

VL - 48

SP - 108

EP - 135

JO - Accounting and Business Research

JF - Accounting and Business Research

SN - 0001-4788

IS - 1

ER -