Quality of investment recommendation – evidence form Polish capital market, income approach

Abstract

In the paper, results of quality assessment of investment recommendations issued by Polish brokerage houses are presented. A hundred investment recommendations were examined, coming from seven different brokerage houses, issued in years 2015–2016. Only income approach and DCF model valuation were analyzed. The research indicates low quality of valuations presented in the Polish investment recommendations. The level of disclosures and assumptions used in the financial models underlying financial forecasting and valuations is not sufficient. Significant objections raises the methodology of discount rate calculation. The risk premium does not cover the local bonus, the assumptions are not revealed, beta is not individually chosen, and beta at level 1 is abused. Problems concerning lack of information about cash flows used for residual value calculation were identified. The study reveals numerous examples of gross methodological errors in investment recommendations, however, common mistakes identified in other studies, like for example the excessive optimism for cash flow forecasting or overvaluation of the long-term cash flow growth rate, were not observed.