Equity valuation: A survey of professional practice

• Date: 01 April 2019
• Author: John D. Stowe,Jerald E. Pinto,Thomas R. Robinson
• Published date: 01 April 2019
• DOI: http://doi.org/10.1002/rfe.1040

ORIGINAL ARTICLE

Equity valuation: A survey of professional practice

Jerald E. Pinto

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Thomas R. Robinson

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John D. Stowe

3

1

CFA Institute, Charlottesville, Virginia

2

AACSB International, Tampa, Florida

3

Ohio University, Athens, Ohio

Correspondence

John D. Stowe, Ohio University, 222

Copeland Hall, Athens, OH 45701, USA.

Email: stowej@ohio.edu

Abstract

This paper reports the results of a scientific survey of the equity valuation prac-

tices of CFA Institute members with equity analysis job responsibilities. Using an

instrument designed to minimize biases in prior valuation surveys and sampling a

larger group than in previous studies (13,500 investment professionals, resulting

in 1,980 valid completed questionnaires), this paper documents professional prac-

tices in the selection of equity valuation approaches, including specific model

variations and key input preferences. Important differences in practice were

observed across geographies and employer firm types.

JEL CLASSIFICATION

G11, G12, G24, M20, D53

KEYWORDS

discounted cash flow models, equity analysis, equity analysts, equity risk premium, equity valuation,

market multiples, real options, residual income, valuation methods

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INTRODUCTION

The valuation estimates and judgments of professional equity analysts play an important role in the functioning of capital

markets by influencing portfolio decisions and consequently share prices. Thousands of investment profes sionals study,

research, and practice equity valuation, and feedback on their success in valuation is meticulously tracked in highl y compet-

itive capital and labor markets. Information about the equity valuation methods that they employ in this competitive envi-

ronment is of great practical interest. There is, however, a dearth of such information that is current, detailed, broad‐based,

and not affected by biases or limitations of the survey instrument. The objective of the survey reported in this paper was to

fill that gap.

Several distinct groups should be interested in the results of this survey. Equity analysts and portfolio managers can use

the information to understand how their practice compares to that of peers. Investors need to appreciate the basis for stock

research and recommendations that their money managers might use. Persons entering the profession ca n benefit from

understanding the competencies that analysts generally possess. Researchers and others interested in factors influencing

equity prices can benefit by understanding what models underlie analyst recommendations.

Extensive surveys have played a prominent role in advancing our knowledge about practice in other areas of finance.

These include surveys on corporate finance (Graham & Harvey, 2001), capital budgeting and capital structure (Graham &

Harvey, 2002), corporate dividends and repurchases (Brav, Graham, Harvey, & Michaely, 2005), earnings quality (Dichev,

Graham, Harvey, & Rajgopal, 2013), and financial analysts (Brown, Call, Clement, & Sharp, 2015). These surveys are

noteworthy for the depth of the survey instruments and the number and quality of their survey respondents. The present

survey does the same for equity valuation practices.

The paper is organized as follows. Findings of prior related research are first briefly summarized, following a description

of the sample for the current survey and the survey instrument; improvements of these in relation to prior surveys are out-

lined. A presentation and analysis of the survey's major findings follow. The paper ends with conclusions.

Received: 21 March 2018

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Revised: 18 June 2018

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Accepted: 22 June 2018

DOI: 10.1002/rfe.1040

Rev Financ Econ. 2019;37:219–233. wileyonlinelibrary.com/journal/rfe © 2018 The University of New Orleans

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