The Use of Valuation Models by UK Investment Analysts

Purpose - To find out how UK investment analysts use valuation models. Design/methodology/approach - Cites prior studies using residual income and discounted cash flow (DCF) models, while proposing to interview analysts. Combines content analysis of 98 equity reports by investment bank analysts between 2000 and 2003, and 35 structured interview responses (in the form of Likert scales) about what models they use, why they use them and how. Findings - Finds that analysts prefer DCF to accruals-based methods, and combine it with price to earnings ratios. Notes they have many reasons for choosing this model, but it is most heavily used on IT and media firms. Adds a distinct preference for DCF among buy-side analysts. Research limitations/implications - Proposes setting up the discipline of 'sociology of financial accounting'. where sell-side analysts interact with fund managers. Originality/value - Uses a direct approach to the questgion of how accounts are used by third parties.