Analysts’ Book Value Forecasts: Initial Evidence from the Perspective of Real-Options-Based Valuation

Abstract

This study examines the usefulness of analysts’ book value forecasts and the economic factors driving analysts’ issuance of these forecasts. Guided by the real-options-based valuation model (ROM) of Zhang (2000), we explicitly link book value forecasts to the need for such information in valuation. We first establish that analysts’ book value forecasts are superior to forecasts that are mechanically imputed from analysts’ own earnings forecasts and those from random walk models and are incrementally informative beyond analysts’ earnings, cash flow, and dividend forecasts. We then employ the ROM to explore the distinct information embedded in book value forecasts and analysts’ decisions to issue these forecasts. Consistent with our expectations, we find that (i) book value forecasts convey growth information that is significantly correlated with ex ante indicators of real options, while analysts’ earnings forecasts do not display this property and (ii) analysts issue more book value forecasts when either growth options or, to a lesser extent, abandonment options are an important part of firm value. Our study sheds light on how analysts’ book value forecasts are useful and under what circumstances analysts provide such information to meet investors’ needs.