The use of intellectual capital information by sell-side analysts in company valuation

Abhayawansa, S., Aleksanyan, M. and Bahtsevangolou, J. (2015) The use of intellectual capital information by sell-side analysts in company valuation. Accounting and Business Research, 45(3), pp. 279-306. (doi: 10.1080/00014788.2014.1002445)

Abstract

This paper investigates the role of intellectual capital information (ICI) in sell-side analysts’ fundamental analysis and valuation of companies. Using in-depth semi-structured interviews, it penetrates the black box of analysts’ valuation decision-making by identifying and conceptualising the mechanisms and rationales by which ICI is integrated within their valuation decision processes. We find that capital market participants are not ambivalent to ICI, and ICI is used: (1) to form analysts’ perceptions of the overall quality, strengths and future prospects of companies; (2) in deriving valuation model inputs; (3) in setting price targets and making investment recommendations; and (4) as an important and integral element in analyst–client communications. We show that: there is a ‘pecking order’ of mechanisms for incorporating ICI in valuations, based on quantifiability; IC valuation is grounded in valuation theory; there are designated entry points in the valuation process for ICI; and a number of factors affect analysts’ ICI use in valuation. We also identify a need to redefine ‘value-relevant’ ICI to include non-price-sensitive information; acknowledge the boundedness and contextuality of analysts’ rationality and motives of their ICI use; and the important role of analyst–client meetings for ICI communication.

• Item Type: Articles
• Additional Information: This is an Accepted Manuscript of an article published by Taylor & Francis Group in Accounting and Business Research on 27/01/2015, available online:http://dx.doi.org/10.1080/00014788.2014.1002445
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Abhayawansa, Dr Subhash and Aleksanyan, Dr Mark
• Authors: Abhayawansa, S., Aleksanyan, M., and Bahtsevangolou, J.
• College/School: College of Social Sciences > Adam Smith Business School > Accounting and Finance
• Journal Name: Accounting and Business Research
• Publisher: Routledge
• ISSN: 0001-4788
• ISSN (Online): 2159-4260
• Published Online: 27 January 2015
• Copyright Holders: Copyright © 2015 Taylor & Francis
• First Published: First published in Accounting and Business Research 45(3):279-306
• Publisher Policy: Reproduced in accordance with the copyright policy of the publisher