Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

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areexpecting its earningsgrowthto be over the nextfive
years.


Information Advantages


Thereareanumberofreasonstobelievethatanalystforecasts
of growth should be better than using historical growth rates.



  • Analysts,inadditiontousinghistoricaldata,canuse
    informationthat hascome out aboutboth thefirm
    andtheoveralleconomysincethepreviousearnings
    reporttomakepredictionsaboutfuturegrowth.This
    information can sometimes lead to significant
    reevaluation of the firm’s expected cash flows.

  • Analystscanalsoconditiontheirgrowthestimatesfor
    a firmon information revealedby competitors on
    pricing policy and future growth. For instance, a
    negativeearningsreportbyonetelecommunications
    firmcanleadtoareassessmentofearningsforother
    telecommunications firms.

  • Analysts sometimes have access to private
    informationaboutthefirmstheyfollowthatmaybe
    relevant in forecasting future growth. This avoids
    answering the delicate question of when private
    information becomes illegal inside information.
    There is no doubt, however, that good private
    informationcanleadtosignificantlybetterestimates
    offuturegrowth.Inanattempttorestrictthistypeof
    information leakage, the Securities and Exchange
    Commission(SEC)issuednewregulations(RegFD)
    in 2000 preventing firmsfrom selectivelyrevealing
    informationto a fewanalystsorinvestors. Outside

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