Graduation Year

Spring 2012

Document Type

Campus Only Senior Thesis

Degree Name

Bachelor of Arts

Department

Economics

Reader 1

Eric Hughson

Reader 2

George Batta

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Terms of Use for work posted in Scholarship@Claremont.

Rights Information

© 2012 Nicholas Coady Smith

Abstract

This paper uses stock market data from 2000-2010 to examine the role long-term growth (LTG) uncertainty plays in equity valuations. In theory, the convex relationship between LTG and per-share value suggests a positive relationship between LTG uncertainty and analysts’ price targets, with higher levels of LTG uncertainty leading to higher, less accurate price targets. However, this paper finds conclusive evidence that analysts are not incorporating LTG uncertainty into their pricing models. This leaves uncertainty regarding the discount rate and the perpetuity growth rate as the only remaining potential sources of upward pressure on analysts’ price targets that are attributable to uncertainty.

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