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http://ssrn.com/abstract=2104433
 
 

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Target Price Forecasts: Fundamentals and Behavioral Factors


Peter Clarkson


University of Queensland - Business School; Simon Fraser University (SFU) - Beedie School of Business; Financial Research Network (FIRN)

Alexander Nekrasov


University of California, Irvine - Paul Merage School of Business

Andreas Simon


Pepperdine University - Graziadio School of Business and Management

Irene Tutticci


University of Queensland - Business School; Financial Research Network (FIRN)

March 22, 2013


Abstract:     
This paper shows that both fundamental and behavioral factors play an important role in analysts’ target price formation. Specifically, analysts’ forecasts of short-term earnings and long-term growth are shown to be important explanatory variables for analysts’ target prices. However, the following behavioral factors that are salient but irrelevant to fundamental value are also shown to explain target price levels and especially target price biases: the past 52-week high price, lagged investor sentiment, and rounding. Increases in the 52-week high and investor sentiment of one standard deviation correspond to increases in the target price bias of 4.7% and 14.7%, respectively, while rounding of the target price corresponds to an increase in the target price bias of 13.6%. We also find that there is a significant spike and absolute maximum in the target price distribution exactly at the 52-week high price. Additionally, our results show that analysts’ target prices are useful in predicting future stock returns beyond earnings forecasts and commonly used risk proxies, but only when the 52-week high price is close to the current stock price and investor sentiment is relatively neutral. We find our results are robust to the inclusion of a lagged target price measure designed to capture unobserved analysts’ incentives and characteristics. Additionally, we find that analysts place greater weight on the behavioral factors in settings with greater task complexity and/or resource constraints.

Number of Pages in PDF File: 50

Keywords: analysts, target prices, 52-week high, investor sentiment, rounding, earnings forecasts, long-term growth, return predictability

JEL Classification: D81, D82, G12, G14, G29, M41

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Date posted: July 12, 2012 ; Last revised: May 1, 2013

Suggested Citation

Clarkson, Peter and Nekrasov, Alexander and Simon, Andreas and Tutticci, Irene, Target Price Forecasts: Fundamentals and Behavioral Factors (March 22, 2013). Available at SSRN: http://ssrn.com/abstract=2104433 or http://dx.doi.org/10.2139/ssrn.2104433

Contact Information

Peter Clarkson
University of Queensland - Business School ( email )
Brisbane, Queensland 4072
Australia
Simon Fraser University (SFU) - Beedie School of Business ( email )
8888 University Drive
Burnaby, British Colombia V5A 1S6
Canada
Financial Research Network (FIRN) ( email )
C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Alexander Nekrasov (Contact Author)
University of California, Irvine - Paul Merage School of Business ( email )
Irvine, CA California 92697-3125
United States
Andreas Simon
Pepperdine University - Graziadio School of Business and Management ( email )
Malibu, CA
United States
Irene Tutticci
University of Queensland - Business School ( email )
Brisbane, Queensland 4072
Australia
+617-3365-6587 (Phone)
+617-3365-6788 (Fax)
Financial Research Network (FIRN) ( email )
C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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