{"title":"Income growth, forecasting, and stock valuation","authors":"Dimitris Psychoyios","doi":"10.1093/imaman/dpad018","DOIUrl":null,"url":null,"abstract":"Abstract We show that using forecasts of a firm’s income growth in the context of stock valuation can lead to overpricing of the firm’s stock, which is consistent with ‘optimism bias’ reported among financial analysts. Firms with volatile earnings, high income growth and low systematic risk are prone to larger valuation errors. To address this issue, we develop a new estimator of the firm value that corrects for the bias from forecasting income growth. The new estimator is significantly superior to the traditional value estimator under various performance measures. To support managerial decision-making, we construct closed-form confidence intervals for the firm value and the implied cost of capital that account for uncertainty in income growth.","PeriodicalId":56296,"journal":{"name":"IMA Journal of Management Mathematics","volume":"6 1","pages":"0"},"PeriodicalIF":1.9000,"publicationDate":"2023-09-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"IMA Journal of Management Mathematics","FirstCategoryId":"1085","ListUrlMain":"https://doi.org/10.1093/imaman/dpad018","RegionNum":3,"RegionCategory":"工程技术","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q3","JCRName":"MANAGEMENT","Score":null,"Total":0}
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Abstract
Abstract We show that using forecasts of a firm’s income growth in the context of stock valuation can lead to overpricing of the firm’s stock, which is consistent with ‘optimism bias’ reported among financial analysts. Firms with volatile earnings, high income growth and low systematic risk are prone to larger valuation errors. To address this issue, we develop a new estimator of the firm value that corrects for the bias from forecasting income growth. The new estimator is significantly superior to the traditional value estimator under various performance measures. To support managerial decision-making, we construct closed-form confidence intervals for the firm value and the implied cost of capital that account for uncertainty in income growth.
期刊介绍：
The mission of this quarterly journal is to publish mathematical research of the highest quality, impact and relevance that can be directly utilised or have demonstrable potential to be employed by managers in profit, not-for-profit, third party and governmental/public organisations to improve their practices. Thus the research must be quantitative and of the highest quality if it is to be published in the journal. Furthermore, the outcome of the research must be ultimately useful for managers. The journal also publishes novel meta-analyses of the literature, reviews of the "state-of-the art" in a manner that provides new insight, and genuine applications of mathematics to real-world problems in the form of case studies. The journal welcomes papers dealing with topics in Operational Research and Management Science, Operations Management, Decision Sciences, Transportation Science, Marketing Science, Analytics, and Financial and Risk Modelling.
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