Valuation Relevance : The use of Information and Choice of Method in Equity Valuation

This thesis is concerned with exploring the equity market price discovery process, the translation and incorporation of new information into stock prices, by studying both what information is included in this process and which valuation methods are used to translate that information into a value. The overarching research question posed in this thesis is: How is equity valued? The overarching question is broad and has been divided into the following sub questions: What valuation methods do companies use when valuing takeover targets? What valuation methods do sell-side analysts use when valuing equity? What factors explain the variation in the use of valuation methods by sell-side analysts? To what extent do sell-side analysts utilize non-financial information in their reports? These questions are addressed in four separate essays. Findings of the thesis emphasized that valuation behavior is contextual to several specific circumstances. Findings showed that companies valuing takeover targets used sophisticated valuation methods to a higher extent than did sell-side analysts. Findings also showed systematic differences in the choice of valuation methods among sell-side analysts. With regards to the use of non-financial information and information on Intellectual Capital this thesis showed that the context of the target firm dictates which information is relevant for predicting future performance, and hence is used by analysts. Additionally, the accessibility of information is an important factor affecting what information is used in the valuation process. Understanding the valuation behavior of the different actors on the capital market is to understand the pricing process of the market, and as such the contribution of this thesis has been to shed more light on the cornerstone of market efficiency- the ability of market actors to identify and buy (sell) under priced (over priced) stocks