DCF Please! Evidence from a Content Analysis of Analyst Reports

Abstract

Using textual analysis for a large sample of analyst reports, we find that analysts are more likely to use DCF model than PE model and engage in more cash flow and discount rate discussions when investors have a stronger demand for value-relevant information. The market reactions to analyst investment opinions based on DCF model are stronger than those based on PE model, especially when the DCF model is accompanied by more cash flow and discount rate discussions. These results indicate that analysts’ valuation process reflects investor demand for value-relevant information and has a bearing on the quality of their research