Target Price Accuracy in Equity Research

41 Pages Posted: 1 Jan 2011

See all articles by Stefano Bonini

Stefano Bonini

Stevens Institute of Technology - School of Business

Laura Zanetti

Bocconi University - Department of Finance

Roberto Bianchini

Bocconi University

Antonio Salvi

Jean Monnet University

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Abstract

Analysts target prices have received limited attention in academic research. In this paper we try to fill the gap by developing an innovative multi-layer accuracy metric that we test on a novel database. Our analysis shows that forecasting accuracy is very limited: prediction errors are consistent, auto-correlated, non-mean reverting and large (up to 36.6%). The size of forecasting errors increases with the predicted growth in the stock price, the size of the company and for loss making firms. Additionally, the intensity of research and the market momentum negatively affect accuracy. These results suggest that analysts' research is systematically biased which supports theoretical predictions by Ottaviani and Sorensen (2006). Since stock price forecasting is largely an unmonitored activity, market participants may fail in fully understanding this behavior, thus not arbitraging away these inefficiencies.

Keywords: target prices, analyst recommendation, security analysis

Suggested Citation

Bonini, Stefano and Zanetti, Laura and Bianchini, Roberto and Salvi, Antonio, Target Price Accuracy in Equity Research. Journal of Business Finance & Accounting, Vol. 37, Issue 9-10, pp. 1177-1217, 2010, Available at SSRN: https://ssrn.com/abstract=1733377 or http://dx.doi.org/10.1111/j.1468-5957.2010.02209.x

Stefano Bonini (Contact Author)

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

Laura Zanetti

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Roberto Bianchini

Bocconi University ( email )

Via Sarfatti 25
20136 Milan, MI 20136
Italy

Antonio Salvi

Jean Monnet University ( email )

34, rue Francis Baulier
Saint-Etienne, 42023
France

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