Dominant valuation model and valuation model accuracy in UK technology, media, and telecom sector

Abstract

This study has investigated the dominant valuation model, and the accuracy of the valuation model from 147 sell-side analysts report issued by top five investment research houses during May 2014 and August 2017 covering 26 UK listed companies in TMT (technology, media, and telecom) sector. Using content analysis and further using univariate and multivariate analysis, it was found that discounted cash flow based models are dominant, and analysts favour the use of Price Earnings (PE) Model in the technology industry. A significant difference in the choice of valuation model is also noted between industries and investment research houses. Multivariate analysis confirmed the significant relationship between valuation model choice and size of the company, investment research house, and industry. Further, the accuracy of valuation model in these reports is tested using six measures of accuracy and performing binomial logistic regression to find the relationship between target price accuracy and factors such as size, recommendation, number of pages in analyst’s reports, market sentiments, analyst’s optimism. It is concluded that PE model performs more accurately than others, followed by DCF models. Multivariate analysis confirmed that the accuracy of the price targets is affected by analyst’s optimism of price target and investment research house.