Accuracy and Bias of Equity Analysts in an Environment Characterized by Higher Disclosure: Empirical Evidence from the Italian Market
Posted: 22 May 2010
Date Written: February 28, 2010
Thousands of reports are published yearly by brokerage houses and investment banks, providing trading advice to investors and forecasts concerning the future market price of stocks (the so called target prices). Using a database of reports concerning blue chips listed on the Italian stock market, we measured the forecasting ability of equity analysts in determining target prices. Having outlined considerable levels of inaccuracy, we explored the weight of the various factors potentially affecting the accuracy of different analyst firms: the boldness of the forecast (measured by the ratio between the target price and the current market price of the stock), the volatility of the stock, the average number of stocks covered by each analyst employed by the firm, the length of the coverage, the past forecasting performance of the analyst. We also explored the correlation between the potential exposure of the analysts to conflicts of interests and the level/sign of his forecasting errors. Finally, we focused on the profitability of a basic trading strategy based on buying (shorting) a stock when the target price indicated by the analysts is higher(lower) than the current market price.
Keywords: Stock Reccomendations, Target Price, Equity Analysts, Conflicts of Interest, Forecast Accurancy
JEL Classification: G14, G24
Suggested Citation: Suggested Citation