Analysis of Equity Valuation Models and Target Price Accuracy: An Evidence From Analyst Reports in Indonesia

Abstract

This study examines whether investment analysts (sell-side) in Indonesia tend to prefer cash-flow-based valuation models over the accrual-based valuation model, how the accuracy of valuation models are used, and whether the use of both valuation models simultaneously for generating target prices can improve accuracy. The researchers conducted a comprehensive content analysis of 99 equity research reports for most companies listed in the LQ-45 index. The results show that in the accrual-based valuation model, in particular, the ratio of stock price to income (P/E) was the most popular valuation model that appeared in equity reports in all sectors. However, from the perspective of the valuation model as the producer of the target price (dominant valuation), discounted cash flow (DCF) was the most popular valuation model used. It was also found that the cash-flow-based valuation model gave the highest accuracy. In addition, the researchers also found significant results in the Chi-square test which showed the use of both valuation models simultaneously could improve the valuation results more precisely by the analysts. This was in line with the intuition that the accrual concept adds value to the relevance of the information to cash flow.