To buy or not to buy? The value of contradictory analyst signals
- 411 Downloads
We study the predictive ability of individual analyst target price changes for post-event abnormal stock returns within each recommendation category. Although prior studies generally demonstrate the investment value of target prices, we find that target price changes do not cause abnormal returns within each recommendation level. Instead, contradictory analyst signals (e.g., strong buy reiterations with large target price decreases) neutralize each other, whereas confirmatory signals reinforce each other. Further, our analysis reveals that large target price downgrades can be explained by preceding stock price decreases. However, upgrades are not preceded by stock price increases, thereby demonstrating asymmetric analyst behavior when adjusting target prices to stock prices. Our results suggest that investors should treat recommendations with caution when they are issued with large contradictory target price changes. Thus, instead of blindly following a recommendation, investors might put more weight on the change in the corresponding target price and consider transaction costs.
KeywordsAnalyst recommendation Target price Stock performance Trading strategy
JEL ClassificationG11 G12 G17 G24
We thank the seminar participants at the 2009 Midwest Finance Association Meeting, the 2009 Conference of the Swiss Society for Financial Market Research, and the 2009 Cologne Colloquium on Financial Markets. Moreover, we are grateful to Markus Schmid, the editor, and an anonymous referee for very helpful comments.
- Bradshaw, M.T.: Analysts’ forecasts: What do we know after decades of work? Working Paper, Boston College (2011)Google Scholar
- Bradshaw, M.T., Brown, L.D.: Do sell-side analysts exhibit differential target price forecasting ability?. Working Paper, Harvard Business School (2006)Google Scholar
- Gleason, C. A., Johnson, W. B., Li, H.: Valuation model use and the price target performance of sell-side equity analysts. Contemporary Accounting Research, forthcoming (2012)Google Scholar
- Grossman, S.J., Stiglitz, J.E.: On the impossibility of informationally efficient markets. Am. Econ. Rev. 70, 393–408 (1980)Google Scholar
- The Street, 2011. Bank of America cut by analysts as layoffs loom. Available at: https://doi.org/www.thestreet.com/story/11244148/1/bank-of-america-cut-by-analysts-as-layoffs-loom.html
- Thomson Reuters, 2011. First Call. Available at: https://doi.org/thomsonreuters.com/products_services/financial/financial_products/a-z/first_call/
- Wermers, R.: Is money really “smart”? New evidence on the relation between mutual fund flows, manager behavior, and performance persistence. Working Paper (2003).Google Scholar