thesecompanies.Zacks,IBES,andFirstCall,tonamethree
services among many, provide summaries of how many
analystsarebullishorbearishaboutthestock,and wecan
oftenaccesstheircompletevaluations.Finally,wehavethe
market’s own estimate of the value of the company—the
marketprice—addingtothemix.Valuationsthatstraytoofar
from this numbermake analystsuncomfortable, sincethey
may reflect large valuation errors (rather than market
mistakes).
Inmanyvaluations,thereareinstitutionalfactorsthataddto
this already substantial bias. For instance, equity research
analysts are more likely to issue buy rather than sell
recommendations;thatis,theyaremorelikelytofindfirmsto
be undervalued than overvalued.
1 Thiscanbetracedpartlytothedifficultiesanalystsfacein
obtaining accessto andcollecting informationon firms on
whichtheyhaveissuedsellrecommendations,andpartlyto
pressure that they face from portfolio managers, some of
whommighthavelargepositionsinthestock,andfromtheir
own firm’s investment banking arms, which have other
profitable relationships with the firms in question.
Therewardandpunishmentstructureassociatedwithfinding
companies to be undervalued and overvalued is also a
contributor to bias. Analysts whose compensation is
dependent upon whether they find firms to be under- or
overvaluedwillbe biasedintheirconclusions.This should
explain why acquisition valuations are so often biased
upward.Theanalysisofthedeal,whichisusuallydonebythe
acquiringfirm’sinvestmentbanker,whoalsohappenstobe
responsibleforcarryingthedealtoitssuccessfulconclusion,
cancometooneoftwoconclusions.Oneistofindthatthe