What is Behind the Figures? Conceptual Mistakes in the Equity Valuations Prepared by Research Analysts in Poland
What is Behind the Figures? Conceptual Mistakes in the Equity Valuations Prepared by Research Analysts in Poland

Summary/Abstract: By their nature, corporate valuations are partially built on analysts’ opinions, and not only onobjective facts. However, it is of primary importance for equity research to be grounded on sound economictheory and existing methodological conventions. Otherwise, an inherent element of subjectivity may degradeinto the complete arbitrariness of the assumptions underlying the valuation model. This paper covers conceptualmistakes which may appear in the calculation of the residual value in discounted cash flow valuationmodels prepared by sell-side equity analysts. In particular, we have analysed some of the essential postulatesunderlying the estimation of the perpetual growth rate. Our study covering 100 randomly selected investmentrecommendations prepared by equity research analysts in Poland, shows that these postulates are notadhered to in most cases. Flawed input data translate into the implied company’s fundamentals devoid ofeconomic sense. Unrealistic assumptions underlying valuation models question the credibility of investmentrecommendations and prompt the discussion over the factors shaping the investment decisions of the marketparticipants.

• Details
• Contents