DCF Please! Evidence from a Textual Analysis of Analyst Reports

Using textual analysis for a large sample of analyst reports, we find that analysts are more likely to use a DCF model and to discuss more cash flow and discount rate information for firms with more uncertainty, especially under heightened aggregate economic uncertainty and bearish market sentiment. The market reactions to target price changes based on a DCF model are stronger, particularly when the analysts present more cash flow and discount rate discussions. These results indicate that analyst valuation process reflects investors’ information demand under uncertainty, and has a bearing on the informativeness of analyst research.