How Do Practitioners Value Common Stock?

Abstract

Early work in the 1970s documented a significant difference between the valuation of stock as taught by academics and as practiced by investment professionals. We revisit the issue of practitioner valuation of common stock using a survey-based investigation. We find that most practitioners use multiple techniques, that those techniques vary across the time horizon employed to estimate future variables and that the significant gap that existed between academics and practitioners continues to this day. We extend earlier work to examine differences between analysts working for different types of institutions and with different asset management styles. <b>TOPICS:</b>Accounting and ratio analysis, security analysis and valuation