Can analysts assess fundamental risk and valuation uncertainty? An empirical analysis of scenario-based value estimates

Can analysts assess fundamental risk and valuation uncertainty? An empirical analysis of scenario-based value estimates

By
Peter Joos, Joseph D. Piotroski, Suraj Srinivasan
Journal of Financial Economics. September
2016, Vol. 121, Issue 3, Pages 645-663

We use a data set of sell-side analysts’ scenario-based equity valuation estimates to examine whether analysts can assess the state-contingent risk surrounding a firm’s fundamental value. We find that the spread in analysts’ scenario-based valuations captures the riskiness of operations and predicts the absolute magnitude of long-run valuation errors and future changes in firm fundamentals. We also show that analysts’ assessment of fundamental risk and its predictive ability systematically improved after the financial crisis, consistent with the macroeconomic shock raising analysts’ awareness of firms’ systematic risk exposures.