Independent thesis Advanced level (professional degree), 20 credits / 30 HE credits
A debate in finance is whether a random investment gives the same return as carefully choose and valuing an amount of shares to invest in. Stock valuating Stock valuation is often done by fundamental valuation models, based on the company's underlying character, which tries to put a correct price on the stock. Today there are several different valuation models that can be used for this purpose. Since valuation models are only mathematical, equity research is underpinned by more subjective assessments about the company and its future.
The purpose with this thesis is to describe which valuation models that are used by professional stock analysts, but also to see if the reliability on the equity research is affected by the used model to valuing the company. Furthermore, we want to see if the job that’s been done to understand the company, measured by the equity research quality, impact the reliability on the equity research.
In this thesis, we have, to achieve our purpose, conducted a quantitative content analysis of 164 equity research done by professional analysts at firms listed on the Stockholm Stock Exchange.
With basis in previous research, we have developed a method for determining the valuation model that is used in the equity research, the reliability on the equity research and a framework for assessing the quality of the equity research.
In the theoretical framework the valuation models involved in our study are described, previous research on the reliability on the equity research and their practical use. Furthermore, we go through how are work can relate to the hypothesis of efficient markets, and describes the equity research quality.
The results of our study are largely a confirmation of earlier research in the area surrounding the valuation models used. The most used valuation model was the discounted cash flow model. Our results suggest, however, an increasing use of the residual earnings model in comparison to previous research.
Our results also show that no differentiation is possible to distinguish between the model used and how reliable the equity research will be. The fact that no difference was detectable, we explain this by that there is not the valuation models, but the predicted values and assumptions about those that affect equity valuations.
We note however that a significant relationship between equity research quality and its reliability; a higher quality meant a higher reliability. We believe that more research into the area is necessary to confirm and strengthen the positive results presented in the paper about the analysis quality.
2011. , 92 p.