The Use of Segment Information by Financial Analysts and Forecast Accuracy: A Study on European Intermediate‐Size Companies

Abstract

This research investigates the usefulness for financial analysts of segment information disclosed by European intermediate‐size companies reporting under IFRS. While most studies on segment information usefulness focus on the consensus aggregated from financial analysts’ forecasts for blue‐chip companies, our study contributes to the literature by investigating the recommendation reports of financial analysts covering European intermediate‐size companies. The study is based on an original, hand‐collected database obtained from a sample of 339 analysts’ recommendation reports for 146 firms. Our research reveals that though a majority of analysts refer to segment information in their reports, only a few of them use it in their valuation models. Moreover, it also demonstrates that the use of segment information by financial analysts is higher for larger firms than for smaller ones and is not associated with greater forecast accuracy. Hence, our results question the usefulness of segment information disclosures for small firms. © 2016 Wiley Periodicals, Inc.

How valuation approach choice affects financial analysts’ target price accuracy

“…Extant literature suggests that analysts predominantly use single-period multiple models, followed by multi-period DCF models to determine price targets (e.g., Asquith et al 2005;Demirakos et al 2010;Imam et al 2013). Analysts are also sensitive to segmental disclosures and frequently refer to this information in their reports (Demerens et al 2017). However, previous research on whether analysts actually value the company by its parts or as stand-alone entity is limited and shows inconsistent results (Chlomou and Demirakos 2020;Demerens et al 2017;Paarz 2011).…”

“…Analysts are also sensitive to segmental disclosures and frequently refer to this information in their reports (Demerens et al 2017). However, previous research on whether analysts actually value the company by its parts or as stand-alone entity is limited and shows inconsistent results (Chlomou and Demirakos 2020;Demerens et al 2017;Paarz 2011). Arguably, the list of possible methods and modifications that financial analysts may use in practice is very long (for examples see Imam et al 2013).…”