Do Sell-Side Analysts Exhibit Differential Target Price Forecasting Ability?

Abstract:     
We examine the overall and individual analyst accuracy of 12-month-ahead target price forecasts. On average, expected returns exceed actual returns by 35% and only 24 (45) percent of target price forecasts are met at the end of (sometime during) the 12-month period. We show that analysts do not exhibit persistent differential abilities to forecast target prices. Although the market response to target price forecasts is significant, the market acts as if sell-side analysts do not exhibit persistent differential abilities to forecast target prices. We show that the analysts in our sample exhibit persistent differential abilities to forecast earnings, but superior earnings forecasting abilities do not portend superior target price forecasting. We interpret our results as follows. Analyst earnings forecast accuracy is subject to considerable scrutiny and it impacts analyst compensation. In contrast, target price forecasts are neither subject to market scrutiny nor are they related to compensation so there is no ex post settling up for the absence of target price forecast accuracy. Thus, analysts face stronger incentives to provide accurate earnings forecasts than for target prices.

Keywords: Analysts, Target Prices, Earnings Forecasts, Valuation

JEL Classifications: E37, G10, G24, G29

Working Paper Series