This study analyzes the accuracy of forecasted target prices within analysts’ reports. We compute a measure for target price forecast accuracy that evaluates the ability of analysts to exactly forecast the exante (unknown) 12-month stock price. Furthermore, we determine factors that explain this accuracy. Target price accuracy is negatively related to analyst-specific optimism and stock-specific risk (measured by volatility and price-to-book ratio). However, target price accuracy is positively related to the level of detail of each report, company size and the reputation of the investment bank. The potential conflicts of interests between an analyst and a covered company do not bias forecast accuracy.
Abarbanell, Jeffery S. (1991): Do Analysts’ Earnings Forecasts Incorporate Information in Prior Stock Price hanges?, Journal of Accounting and Economics, 14 (2): 147–165.
Abdel-Khalik, A. Rashad and Bipin B. Ajinkya (1982): Returns to Informational Advantages: The Case of Analysts’ Forecast Revisions, The Accounting Review, 57 (4): 661–680.
Agrawal, Anup and Mark A. Chen (2008): Do Analyst Conflicts Matter? Evidence from Stock Recommendations, Journal of Law and Economics, 51 (3): 503–537.
Ali, Ashiq, April Klein, and James Rosenfeld (1992): Analysts’ Use of Information about Permanent and Transitory Earnings Components in Forecasting Annual EPS, The Accounting Review, 67 (1): 183–198.
Amir, Eli and Baruch Lev (1996): Value-Relevance of Nonfinancial Information: The Wireless Communication Industry, Journal of Accounting and Economics, 22 (1–3): 3–30.
Asquith, Paul, Michael B. Mikhail, and Andrea S. Au (2005): Information Content of Equity Analyst Reports, Journal of Financial Economics, 75 (2): 245–282.
Bandyopadhyay, Sati P., Lawrence D. Brown, and Gordon D. Richardson (1995): Analysts’ Use of Earnings Forecasts in Predicting Stock Returns: Forecast Horizon Effects, International Journal of Forecasting, 11 (3): 429–445.
Banz, Rolf W. (1981): The Relationship between Return and Market Value of Common Stocks, Journal of Financial Economics, 9 (1): 3–18.
Barber, Brad M. and Terrance Odean (2008): All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors, Review of Financial Studies, 21 (2): 785–818.
Barber, Brad M., Reuven Lehavy, Maureen McNichols, and Brett Trueman (2001): Can Investors Profit from the Prophets? Security Analyst Recommendations and Stock Returns, Journal of Finance, 56 (2): 531–563.
Barker, Richard G. (1999): The Role of Dividends in Valuation Models Used by Analysts and Fund Managers, The European Accounting Review, 8 (2): 195–218.
Beckers, Stan, Miachel Steliaros, and Alexander Thomson (2004): Bias in European Analysts’ Earnings Forecasts, Financial Analysts Journal, 60 (2): 74–85.
Bernhardt, Dan, Murillo Campello,and Edward Kutsoati (2004): Analyst Compensation and Forecast Bias, Working Paper, SSRN, http://ssrn.com/abstract=173888.
Bonini, Stefano, Laura Zanetti, Roberto Bianchini, and Antonio Salvi (2010): Target Price Accuracy in Equity Research, Journal of Business Finance & Accounting, 37 (9–10): 1177–1217.
Bradley, Daniel J., Bradford D. Jordan, and Jay R. Ritter (2003): The Quiet Period Goes out with a Bang, Journal of Finance, 58 (1): 1–36.
Bradshaw, Mark T. (2002): The Use of Target Prices to Justify Sell-Side Analysts’ Stock Recommendations, Accounting Horizons, 16 (1): 27–41.
Bradshaw, Mark T. and Lawrence D. Brown (2006): Do Sell-Side Analysts Exhibit Differential Target Price Forecasting Ability?, Working Paper, SSRN, http://ssrn.com/abstract=698581.
Bradshaw, Mark T., Scott A. Richardson, and Richard G. Sloan (2003): Pump and Dump: An Empirical Analysis of the Relation between Corporate Financing Activities and Sell-Side Analyst Research, Working Paper, SSRN, http://ssrn.com/abstract=%20410521.
Brav, Alon and Reuven Lehavy (2003): An Empirical Analysis of Analysts’ Target Prices: Short-Term Informativeness and Long-Term Dynamics, Journal of Finance, 58 (5): 1933–1967.
Breton, Gaétan and Richard J. Taffler (2001): Accounting Information and Analyst Stock Recommendation Decisions: A Content Analysis Approach, Accounting and Business Research, 31 (2): 91–101.
Brown, Lawrence D. (1993): Earnings Forecasting Research: Its Implications for Capital Market Research, International Journal of Forecasting, 9 (3): 295–320.
Brown, Lawrence D. and David M. Chen (1990): How Good is the All-American Research Team in Forecasting Earnings?, Journal of Business Forecasting, 9 (4): 14–18.
Brown, Lawrence D. (ed.) (2000): I/B/E/S Research Bibliography, ition6th ed., http://www2.gsu.edu/∼wwwaccFaculty/lbrown/ Bibliography.pdf (Access date: 2011-02-15).
Butler, Kirt C. and Hakan Saraoglu (1999): Improving Analysts’ Negative Earnings Forecasts, Financial Analysts Journal, 55 (3): 48–56.
Capstaff, John, Krishna Paudyal, and William Rees (1999): The Relative Forecast Accuracy of UK Brokers, Accounting and Business Research, 30 (1): 3–16.
Carhart, Mark M. (1997): On Persistence in Mutual Fund Performance, Journal of Finance, 52 (1): 57–82.
Chopra, Vijay K. (1998): Why So Much Error in Analysts’ Earnings Forecasts?, Financial Analysts Journal, 54 (6): 35–42.
Clement, Michael B. (1999): Analyst Forecast Accuracy: Do Ability, Resources, and Portfolio Complexity Matter?, Journal of Accounting and Economics, 27 (3): 285–303.
Cooper, Rick A., Theodore E. Day, and Craig M. Lewis (2001): Following the Leader: A Study of Individual Analysts’ Earnings Forecasts, Journal of Financial Economics, 61 (3): 383–416.
Cowen, Amanda, Boris Groysberg, and Paul Healy (2006): Which Types of Analyst Firms Are More Optimistic?, Journal of Accounting and Economics, 41 (1–2): 119–146.
De Bondt, Werner F. M. and William P. Forbes (1999): Herding in Analyst Earnings Forecasts: Evidence from the United Kingdom, European Financial Management, 5 (2): 143–163.
Dechow, Patricia M., Amy P. Hutton, and Richard G. Sloan (2000): The Relation between Analysts’ Forecasts of Long-Term Earnings Growth and Stock Price Performance Following Equity Offerings, Contemporary Accounting Research, 17 (1): 1–32.
Dreman, David N. and Michael A. Berry (1995): Analyst Forecasting Errors and Their Implications for Security Analysis, Financial Analysts Journal, 51 (3): 30–41.
Dugar, Amitabh and Siva Nathan (1995): The Effect of Investment Banking Relationships on Financial Analysts’ Earnings Forecasts and Investment Recommendations, Contemporary Accounting Research, 12 (1): 131–160.
Easterwood, John C. and Stacey R. Nutt (1999): Inefficiency in Analysts’ Earnings Forecasts: Systematic Misreaction or Systematic Optimism?, Journal of Finance, 54 (5): 1777–1797.
Elton, Edwin J., Martin J. Gruber, and Seth Grossman (1986): Discrete Expectational Data and Portfolio Performance, Journal of Finance, 41 (3): 699–713.
Ertimur, Yonca, Jayanthi Sunder, and Shyam V. Sunder (2007): Measure for Measure: The Relation Between Forecast Accuracy and Recommendation Profitability of Analysts, Journal of Accounting Research, 45 (3): 567–606.
Fang, Lily H. and Ayako Yasuda (2010): Are Stars’ Opinions Worth More? The Relation between Analyst Reputation and Recommendation Values, Working Paper, SSRN, http://ssrn.%20com/abstract=687491.
Francis, Jennifer and Donna Philbrick (1993): Analysts’ Decisions as Products of a Multi-Task Environment, Journal of Accounting Research, 31 (2): 216–230.
Francis, Jennifer and Leonard Soffer (1997): The Relative Informativeness of Analysts’ Stock Recommendations and Earnings Forecast Revisions, Journal of Accounting Research, 35 (2): 193–211.
Gleason, Cristi A., W. Bruce Johnson, and Haidan Li (2008): Valuation Model Use and Target Performance of Sell-Side Equity Analysts, Working Paper, SSRN, http://ssrn.com/abstract=930720.
Hayes, Rachel M. (1998): The Impact of Trading Commission Incentives on Analysts’ Stock Coverage Decisions and Earnings Forecasts, Journal of Accounting Research, 36 (2): 299–320.
Hong, Harrison and Jeffrey D. Kubik (2003): Analyzing the Analysts: Career Concerns and Biased Earnings Forecasts, Journal of Finance, 58 (1): 313–351.
Huberts, Lex C. and Russell J. Fuller (1995): Predictability Bias in the U.S. Equity Market, Financial Analysts Journal, 51 (2): 12–28.
Iskoz, Sergey (2003): Bias in Underwriter Analyst Recommendations: Does it Matter?, Working Paper, SSRN, http://ssrn.com/%20abstract=481442.
Jacob, John, Thomas Z. Lys, and Margaret A. Neale (1999): Expertise in Forecasting Performance of Security Analysts, Journal of Accounting and Economics, 28 (1): 51–82.
Kerl, Alexander G. and Andreas Walter (2008): Never Judge a Book by Its Cover: What Security Analysts Have to Say Beyond Recommendations, Financial Markets and Portfolio Management, 22 (4): 289–321.
La Porta, Rafael (1996): Expectations and the Cross-Section of Stock Returns, Journal of Finance, 51 (5): 1715–1742.
Lin, Hsiou-Wei and Maureen F. McNichols (1998): Underwriting Relationships, Analysts’ Earnings Forecasts and Investment Recommendations, Journal of Accounting and Economics, 25 (1): 101–127.
Loh, Roger K. and G. Mujtaba Mian (2006): Do Accurate Earnings Forecasts Facilitate Superior Investment Recommendations?, Journal of Financial Economics, 80 (2): 455–483.
Lys, Thomas and Sungkyu Sohn (1990): The Association between Revisions of Financial Analysts’ Earnings Forecasts and Security-Price Changes, Journal of Accounting and Economics, 13 (4): 341–363.
Michaely, Roni and Kent L. Womack (1999): Conflict of Interest and the Credibility of Underwriter Analyst Recommendations, Review of Financial Studies, 12 (4): 653–686.
Mikhail, Michael B., Beverly R. Walther, and Richard H. Willis (1997): Do Security Analysts Improve Their Performance with Experience?, Journal of Accounting Research, 35 (Suppl.): 131–157.
Previts, Gary John, Robert J. Bricker, Thomas R. Robinson, and Stephen J. Young (1994): A Content Analysis of Sell-Side Financial Analyst Company Reports, Accounting Horizons, 8 (2): 55–70.
Schipper, Katherine (1991): Analysts’ Forecasts, Accounting Horizons, 5 (4): 105–121.
Sinha, Praveen, Lawrence D. Brown, and Somnath Das (1997): A Re-Examination of Financial Analysts’ Differential Earnings Forecast Accuracy, Contemporary Accounting Research, 14 (1): 1–42.
Stickel, Scott E. (1990): Predicting Individual Analyst Earnings Forecasts, Journal of Accounting Research, 28 (2): 409–417.
Stickel, Scott E. (1991): Common Stock Returns Surrounding Earnings Forecast Revisions: More Puzzling Evidence, The Accounting Review, 66 (2): 402–416.
Stickel, Scott E. (1992): Reputation and Performance Among Security Analysts, Journal of Finance, 47 (5): 1811–1836.
Stickel, Scott E. (1995): The Anatomy of the Performance of Buy and Sell Recommendations, Financial Analysts Journal, 51 (5): 25–39.
White, Halbert (1980): A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity, Econometrica, 48 (4): 817–838.
Womack, Kent L. (1996): Do Brokerage Analysts’ Recommendations Have Investment Value?, Journal of Finance, 51 (1): 137–167.
About this article
Cite this article
Kerl, A.G. Target Price Accuracy. Bus Res 4, 74–96 (2011). https://doi.org/10.1007/BF03342727
- target prices
- forecast accuracy
- financial report
- security analysis
- efficient capital markets
- financial analysts
- conflicts of interest
- analyst report
- equity analysis
- forecast deviation
- information content