How do sell-side analysts obtain price-earnings multiples to value firms?

Yin, Yuan and Peasnell, Kenneth Vincent and Hunt, Herbert G. (2018) How do sell-side analysts obtain price-earnings multiples to value firms? Accounting and Business Research, 48 (1). pp. 108-135. ISSN 0001-4788

PDF (Yin, Peasnell and Hunt ABR Analyst PE June 2016)
Yin_Peasnell_and_Hunt_ABR_Analyst_PE_June_2016.pdf - Accepted Version
Available under License Creative Commons Attribution-NonCommercial.

Download (456kB)


Previous studies of analysts’ valuation methods show that sell-side analysts often rely on multiples-based relative valuation methods in deriving target price forecasts, predominantly earnings-based multiples. However, little is known about how analysts actually arrive at the earnings multiples that they apply in their valuations. Based on extant valuation theory, we analyse three benchmarks/reference points that analysts use to select these multiples using U.S. data. By mimicking analysts’ relative valuation processes, we show that analysts tend to assign earnings multiple premiums (discounts) to those firms expected to have growth premiums (higher risk levels) relative to comparable firms. We provide evidence that analysts use firms’ historical earnings multiples as benchmarks, and assign firms that are expected to have more (less) attractive fundamentals than they have had in the past earnings multiples that are at a premium (discount) relative to the average historical earnings multiples at which they traded. The forward P/E multiple for the broad U.S. market index signals the market’s expectations about the growth prospects of the U.S. economy and future economic conditions and we also find that changes in this multiple affect analysts’ choices of firm-specific earnings multiples.

Item Type:
Journal Article
Journal or Publication Title:
Accounting and Business Research
Additional Information:
This is an Accepted Manuscript of an article published by Taylor & Francis in Accounting and Business Research on 16/11/2016, available online:
Uncontrolled Keywords:
ID Code:
Deposited By:
Deposited On:
11 Aug 2016 10:34
Last Modified:
22 Nov 2022 03:32