Working Paper | 2012

Can Analysts Assess Fundamental Risk and Valuation Uncertainty? An Empirical Analysis of Scenario-Based Value Estimates

by Peter R. Joos, Joseph D. Piotroski and Suraj Srinivasan

Abstract

We use a dataset of sell-side analysts' scenario-based valuation estimates to examine whether analysts reliably assess the risk surrounding a firm's fundamenatal value. We find that the spread in analysts' state-side contingent valuations captures the riskiness of operations and predicts the absolute magnitude of future long-run valuation errors and changes in fundamentals. Similarly, asymmetry embedded in the analysts' scenario-based valuations conveys information about asymmetric risk-reward exposure and predicts skewness in future long-run valuation errors; however, embedded asymmetry is not correlated with changes in fundamentals. The results confirm that analysts' valuations reflect both state-contingent risk assessments and non-fundamental factors.

Keywords: valuation; analyst forecasts; scenarios; uncertainty; Risk and Uncertainty; Valuation;

Citation:

Joos, Peter R., Joseph D. Piotroski, and Suraj Srinivasan. "Can Analysts Assess Fundamental Risk and Valuation Uncertainty? An Empirical Analysis of Scenario-Based Value Estimates." Working Paper, September 2012.