Industry, Behavioural and Economic Influences on the Implementation of Valuation Methods

This thesis examines which valuation methods equity research analysts use in order to value midcap firms in different industries around the world. The relevance of this research is to understand the decision process of how equity research analysts determine which valuation method is the most appropriate. This paper focuses on the influences of industry, investor sentiment and the financial crisis. Binary logit models have been used in order to determine whether these factors play a role in the employment of a certain valuation metric. By conducting a descriptive analysis on the 412 equity research reports it became clear that the DCF method (181) is the most frequently applied method, shortly followed by the price-to-earnings (P/E) multiple method (168). The logit models show that the industry in which a company is active, measured by the percentage of (in)tangible assets, has a significant effect on the equity researcher's valuation behaviour. In addition, it has become clear that investor sentiment does have an effect on the chosen valuation method. However, the results are ambiguous and further research is recommended. Finally, the current global financial crisis has had a negative effect on the use of multiples as a valuation metric. Nonetheless, it is not clear that there has been a shift from multiples towards the DCF method.