An Empirical Analysis of Analysts' Target Prices: Short‐term Informativeness and Long‐term Dynamics

Abstract

Using a large database of analysts' target prices issued over the period 19971 999, we examine short-term market reactions to target price revisions and long-term comovement of target and stock prices.We ¢nd a signi¢cant market reaction to the information contained in analysts' target prices, both unconditionally and conditional on contemporaneously issued stock recommendation and earnings forecast revisions. Using a cointegration approach, we analyze the long-term behavior of market and target prices. We ¢nd that, on average, the one-year-ahead target price is 28 percent higher than the current market price. ACADEMICS, PRACTITIONERS, AND INDIVIDUAL INVESTORS have long been interested in un-derstanding the value and usefulness of sell-side analysts' equity reports. In recent years, security analysts have been increasingly disclosing target prices in these reports, along with their stock recommendations and earnings forecasts. These target prices provide market participants with analysts' most concise and explicit statement on the magnitude of the ¢rm's expected value. Despite the increasing prominence of target prices, their role in conveying information to market participants and their contribution to the formation of equity prices have remained largely unexplored. 1 This paper provides new evidence on these issues.

Analysts’ Earnings Forecast, Recommendation,and Target Price Revisions

“…Da and Schaumburg [2011] documented that industry relative valuations, which are implicit in analyst target prices, provide investors with valuable information, although the implied absolute valuations themselves are much less informative. More closely related to our study, Brav and Lehavy [2003] found a significant market reaction to the information contained in analyst target prices, both unconditionally and conditional on contemporaneously issued stock recommendation revisions and earnings forecast revisions. 1 Although Brav and Lehavy generally found on average no significant excess returns in the periods subsequent to target price revisions, they did show that the market underreacts to target price revisions conditional on certain recommendation revisions.…”

“…While Brav and Lehavy [2003] provided some initial evidence on how investors respond to revisions in target prices, as they cautioned in their article, their sample period (1997)(1998)(1999) coincides with the highs of the bull market in the United States, which might be viewed as an historically unusual period. Therefore, their results may not be generalizable to other periods.…”

Analysts' Consensus and Target Price Accuracy: A Study in Latin America

“…In this respect, results which indicate a significant association between the excess of returns regarding the recommendation issuance and the recommendation level are presented. Other studies in the field, such as the ones carried out by Barber, Lehavy, McNichols and Trueman (2001); Brav and Lehavy (2003); Stickel (1995);and Womack (1996), suggest that target prices are significantly associated with excess returns in the period of the event.…”

“…The previous literature points to analysts as information intermediaries who act between companies and investors, and as one of the responsible agents for reducing information asymmetry. Some studies observed that target prices are significantly associated with exceeding returns in the period of the event (e.g., Barber, Lehavy, McNichols, & Trueman, 2001;Brav & Lehavy, 2003;Stickel, 1995;Womack, 1996).…”

Does Ethnicity Pay? Evidence from Overseas Chinese FDI in China

“…But it should be noted that we repeated all of the tests on the two other performance measures as well, and the results were qualitatively consistent across all three performance measures. Furthermore, because the distributions of the ratio variables are conducive to outliers, following the standard empirical finance and accounting literature on the treatment of outliers, such as Brav and Lehavy (2003) and Durnev and Kim (2005), we winsorized the data at the 1% and 99% levels. 7 Our results are robust to whether we perform such winsorization.…”