Do sell-side analysts exhibit differential target price forecasting ability?
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Do sell-side analysts exhibit differential target price forecasting ability? Mark T. Bradshaw • Lawrence D. Brown Kelly Huang
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Springer Science+Business Media New York 2012
Abstract We examine the overall and individual analyst performance of 12-month-ahead target price forecasts over the 10 years from 2000 through 2009. Implied target price-based returns exceed actual returns by an average of 15 %, and absolute target price forecast errors average 45 %. At the end of the 12-month forecast horizon, only 38 % of target prices are met, but 64 % are met at some time during the forecast horizon. We find statistically significant but economically weak evidence of persistent differential abilities by sell-side analysts to forecast target prices. Target price announcement period return analyses indicate no differential market reactions to analysts’ target price revisions conditional on their recent target price forecast performance. This finding is consistent with the market understanding that analysts have, at best, limited abilities to persistently provide accurate target price forecasts. Keywords Valuation
Security analysts Target price forecasts Persistent forecast ability
JEL Classification
E37 G10 G24 G29
M. T. Bradshaw (&) Carroll School of Management, Boston College, 140 Commonwealth Ave., Chestnut Hill, MA 02467, USA e-mail: [email protected] L. D. Brown Fox School of Business, Temple University, 1801 Liacouras Walk, Philadelphia, PA 19122, USA e-mail: [email protected] K. Huang Culverhouse School of Accountancy, University of Alabama, Box 870220, Tuscaloosa, AL 35487, USA e-mail: [email protected]
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1 Introduction Most sell-side analysts include three quantitative elements in their research reports: earnings forecasts, stock recommendations, and target price forecasts (Bradshaw 2002; Asquith et al. 2005).1 The literature has shown that analysts’ earnings forecasts, stock recommendations, target price forecasts significantly affect stock prices, and that analysts exhibit differential abilities to predict earnings and make profitable recommendations. From the perspective of investors who use analyst research, most earnings forecasts are short-term and cover limited periods (e.g., a fiscal quarter), while stock recommendations are discrete (e.g., sell, hold, buy). In contrast, the continuous nature and direct valuation implications of target price forecasts make them a potentially useful investment signal regarding firm valuation. Despite hundreds of studies on analyst earnings forecasts and stock recommendations, few have examined the ability of analysts to forecast target prices.2 We examine the overall and individual analyst accuracy of 12-month-ahead target price forecasts and assess whether analysts exhibit persistent differential abilities to forecast them. We conduct our empirical analyses in four stages. First, we quantify analysts’ target price performance. Second, we examine whether individual analysts exhibit differential abilities to forecast target
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