Analyst Characteristics and Beliefs
Thevaluationapproachthatwechoosetousewilldependon
ourtimehorizon,thereasonwearedoingthevaluationinthe
firstplace,andwhatwethinkaboutmarkets—whetherthey
areefficient,andiftheyarenot,whatformtheinefficiency
takes.
Time Horizon
At one extreme, in discounted cash flow valuation, we
consider a firm as a going concern that may last into
perpetuity.Attheotherextreme,withliquidationvaluation,
weareestimatingvalueontheassumptionthatthefirmwill
ceaseoperationstoday.Withrelativevaluationandcontingent
claimvaluation,wetakeanintermediatepositionbetweenthe
two.Notsurprisingly, then,weshouldbeusing discounted
cash flow valuation if we have long time horizons, and
relativevaluationifwehaveshortertimehorizons.Thismay
explainwhydiscountedcashflowvaluationismoreprevalent
invaluingafirmforanacquisitionandrelativevaluationis
morecommoninequityresearchandportfoliomanagement.
Figure18.5providesthelinkbetweentimehorizonandmodel
choice.
FIGURE 18.5 Investor Time Horizon and Valuation
Approaches