Finanse, Rynki Finansowe, Ubezpieczenia

Previously: Zeszyty Naukowe Uniwersytetu Szczecińskiego. Finanse, Rynki Finansowe, Ubezpieczenia

ISSN: 2450-7741    OAI    DOI: 10.18276/frfu.2017.1.85-30
CC BY-SA   Open Access 

Issue archive / 1/2017 (85)
What is Behind the Figures? Conceptual Mistakes in the Equity Valuations Prepared by Research Analysts in Poland

Authors: Paweł Mielcarz
Akademia Leona Koźmińskiego, Katedra Finansów

Dmytro Osiichuk
Akademia Leona Koźmińskiego w Warszawie
Keywords: RONIC perpetual growth rate valuation investment recommendation
Year of publication:2017
Page range:13 (363-375)
Cited-by (Crossref) ?:


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