It may be that we have read something in the press (good or bad) about the company or heard from an expert that it was under or over valued.Thus, we already begin with a perception about the company that we are about to value. We add to the bias when we collect the information we need to value the firm. The annual report and other financial statements include not only the accounting numbers but also management discussions of performance, often putting the best possible spin on the numbers. With many larger companies, it is easy to access what other analysts following the stock think about these companies.
There are three ways in which our views on a company (and the biases we have) can manifest themselves in value. The first is in the inputs that we use in the valuation. When we value companies, we constantly come to forks in the road where we have to make assumptions to move on. These assumptions can be optimistic or pessimistic.
The second is in what we will call post-valuation tinkering, where analysts revisit assumptions after a valuation in an attempt to get a value closer to what they had expected to obtain starting off. Thus, an analyst who values a company at $ 15 per share, when the market price is $ 25, may revise his growth rates upwards and his risk downwards to come up a higher value, if she believed that the company was under valued to begin with.
The third is to leave the value as is but attribute the difference between the value we estimate and the value we think is the right one to aqualitative factor such as synergy or strategic considerations.
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