Professor John Hand, UNC Kenan-Flagler Business School
We investigate the number of and reasons for errors and questionable judgments that sell-side equity analysts make in constructing and executing DCF equity valuation models. For a sample of 120 DCF models detailed in reports issued by US brokers in 2012 and 2013, we estimate that analysts make a median of three theoretic or execution errors and four questionable economic judgments per DCF. Recalculating analysts’ DCFs after correcting for major errors changes analysts’ mean valuations and target prices by between -2% and 14% per error. Based on a combination of regression analysis and face-to-face interviews with analysts and those who oversee them, we conclude that analysts’ DCF modelling behaviour is semi-sophisticated in that analysts both genuinely make mistakes regarding certain aspects of correctly valuing equity, but also respond rationally to the incentives they face, particularly that they are not directly compensated for being textbook DCF correct.
John R.M. Hand is the H. Allen Andrew Distinguished Professor at UNC Kenan-Flagler. With wide ranging interests in accounting, entrepreneurship and finance, Professor Hand’s current research focuses on equity analysts’ financial statement forecasts and valuation models, the identities and economic importance of multidimensional stock return predictive signals, and what hedge funds tell their investors. He is co-author of Intangible Assets: Values, Measures and Risks (Oxford University Press, 2003) with Baruch Lev of New York University.
Professor Hand has twice won the American Accounting Association’s competitive manuscript competition for his scholarship. He teaches on UNC Kenan-Flagler’s MBA, Masters of Accounting, undergraduate, PhD and executive development programmes, and in 2013 received the business school’s Weatherspoon Award for MAC Teaching and the 2008 Weatherspoon Distinguished Award for MBA Teaching. From 2007-2011 he served as associate dean of UNC Kenan-Flagler’s top-ranked Master of Accounting programme.
John Hand received his PhD and his MBA with honours from the University of Chicago. He earned his BSc at Bristol University, England, where he graduated first in his class and with highest honours.