The irrelevance of much
academic research
Hugh Osburn belieHugh Osburn believes that a swathe of researesearch into valuation is misdirected
because it has limited relevance to local professionals. He blames a sionals. He blames a genergeneral
bias tbi towardds the US as wth US ell as the prll th evailing culturili lt e within someithi
universities, and calls for a whole new attitude
BY: HUGH OSBURN, CFA
© IGOR KOPELNITSKY
hile much valuation-related
W
research aimed at professionals is
excellent, there is also a great deal
that has no relevance and
therefore leads to lower quality valuations. Th ere
are many reasons: research available to UK and
European professionals is based on US market
data, a US bias in academic journals and a lack
of internally generated funding and direction
at universities.
An example of research which is relevant but
has not as yet been published, is the study by
Professor Martin Walker and two of his
associates at the Manchester Business School
into ‘the properties and usefulness of the target
prices of UK analysts’. Th is extends prior research into the same topic
conducted in the US markets and it promises to be of great interest to
EXECUTIVE SUMMARY
professional investors infl uenced by such target prices when making their
• Low quality research contributes to low
investment decisions and recommendations.
quality valuations.
Less useful US-based research, however, comes from Professor James Ohlson
• Research used by European
of the University of Arizona, an authority on equity valuation who has
professionals is often based exclusively
developed a couple of interesting mathematical models embodying concepts
on US data.
which have previously been widely accepted within the valuation community.
• The culture in university research
Th ese include the superiority of P/E ratios based upon brokers’ forecasts of
departments must be changed.
earnings over ratios based on historical data, the need to take into account the
impact of anticipated growth over the longer term and the theoretical
equivalence of a correctly executed DCF valuation and a correctly executed
forward P/E valuation. A particularly elegant formula has also been derived for
the cost of equity implicit within the quoted price for a company. To the typical
practitioner, however, this latter formula remains of limited use as it does not tell
him what he needs to know, namely: what is the most relevant cost of equity to
WWW.CFAUK.ORG PROFESSIONAL INVESTOR 35
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