To Buy or Not to Buy? The Value of Contradictory Analyst Signals

33 Pages Posted: 29 Feb 2012 Last revised: 9 Jan 2013

See all articles by Stefan Kanne

Stefan Kanne

Karlsruhe Institute of Technology (KIT) - Institute for Finance

Jan Klobucnik

University of Cologne

Daniel Kreutzmann

University of Cologne

Soenke Sievers

Paderborn University

Date Written: May 23, 2012

Abstract

We study the predictive ability of individual analyst target price changes for post-event abnormal stock returns within each recommendation category. Although prior studies generally demonstrate the investment value of target prices, we find that target price changes do not cause abnormal returns within each recommendation level. Instead, contradictory analyst signals (e.g., strong buy reiterations with large target price decreases) neutralize each other, whereas confirmatory signals reinforce each other. Further, our analysis reveals that large target price downgrades can be explained by preceding stock price decreases. However, upgrades are not preceded by stock price increases, thereby demonstrating an asymmetric analyst behavior when adjusting target prices to stock prices. Our results suggest that investors should treat recommendations with caution when they are issued with large contradictory target price changes. Thus, instead of blindly following a recommendation, investors might put more weight on the change in the corresponding target price and consider transaction costs.

Keywords: Analyst, Recommendation, Target Price, Stock Performance, Trading Strategy

JEL Classification: G11, G12, G17, G24

Suggested Citation

Kanne, Stefan and Klobucnik, Jan and Kreutzmann, Daniel and Sievers, Soenke, To Buy or Not to Buy? The Value of Contradictory Analyst Signals (May 23, 2012). Available at SSRN: https://ssrn.com/abstract=2012599 or http://dx.doi.org/10.2139/ssrn.2012599

Stefan Kanne

Karlsruhe Institute of Technology (KIT) - Institute for Finance ( email )

D-76128 Karlsruhe
Karlsruhe
Germany

Jan Klobucnik (Contact Author)

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

Daniel Kreutzmann

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

Soenke Sievers

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

HOME PAGE: http://www.upb.de/accounting

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