Discounted cash flow (DCF)-based target price forecasts have the highest target price accuracy (TPA) of 70 per cent, while book value-based forecasts have the lowest TPA of 51.1 per cent for buy recommendations in India. Surprisingly, despite its superior performance, DCF is the least used valuation model as analysts prefer heuristics-driven earnings before interest, taxes, depreciation and amortization (EBITDA) or earnings multiples to produce target price forecasts. A significant and negative relationship with promoter holding explains the underperformance of book value-based target price forecasts—promoters possibly provide analysts with inflated book values which eventually result in inflated target price forecasts and lower target price accuracy.
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