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The effect of dividend payout ratio on the valuation model choice by financial analysts
(2020-12-29) Vasileiadis, Christos; Βασιλειάδης, Χρήστος; Siougle, Georgia; Tzovas, Christos; Demirakos, Efthimios
The choice of the most appropriate valuation model to turn valuation into a target price forecast is an issue that has significantly troubled equity valuation analysts and researchers over the years. This paper examines whether this choice is affected by the dividend payout ratio of a corporation. To accomplish that, it undertakes a content analysis of 161 equity research reports based on the 17 highest and 17 lowest dividend paying corporations of the FTSE 350 Index in the United Kingdom. Literature has identified a number of factors that analysts take into account when they make their valuation model choice including the sector the corporations operate in, their fundamental characteristics and the ease of use and application of each valuation model. The purpose of this paper is to add an extra explanatory factor to their valuation model usage patterns and proves that a higher dividend payout ratio encourages the analysts to employ multiperiod valuation model techniques based on dividends or cash flow more frequently than accounting/accruals-based single-period multiples. Through a series of observations and formal tests, this paper also finds that there are no analyst or financial institution-specific patterns that favour the use of a particular valuation model. Our belief is that, although financial theorists have devoted an important research on this topic, mispricing of stocks still tackles the stock markets around the world. Therefore, our goal is to provide an additional explanatory factor to the ‘guide’ the analysts follow before they select the model that will result to the most accurate valuation outcome.