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Target price forecasts: Fundamental and non-fundamental factors

47 Pages Posted: 12 Jul 2012 Last revised: 13 Jun 2015

Peter Clarkson

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

Alexander Nekrasov

University of Illinois at Chicago

Andreas Simon

Pepperdine University - Graziadio School of Business and Management

Irene Tutticci

University of Queensland - Business School

Date Written: June 1, 2015

Abstract

This paper reveals both fundamental and non-fundamental factors play an important role in analysts’ target price formation. Analysts’ forecasts of short-term earnings and long-term growth are shown to be important explanatory variables for target prices; equally, the following salient non-fundamental factors are also shown to explain target price levels and especially target price biases: the 52-week high price and recent market sentiment. Here, increases in the 52-week high and market sentiment measures of one standard deviation correspond to increases in positive target price bias of 4.8% and 14.7%, respectively. Initially our analysis is constrained to analysts who provide long-term growth forecasts, however, our findings are robust to the removal of this constraint and the broader set of analysts. Our analysis reveals that analysts place greater weight on these non-fundamental factors in settings with greater task complexity and/or resource constraints, and when they rely on valuation heuristics as opposed to more rigorous valuation methodology, and that this greater weight is associated with increased optimistic bias. Finally, our results show that analysts’ target prices are useful in predicting future stock returns beyond earnings forecasts and commonly used risk proxies. However, in an internally consistent fashion, the informativeness of target prices for future returns is significantly reduced when greater weight is placed on either the 52-week high or recent market sentiment in the target price formation process.

Keywords: target price forecasts, 52-week high, investor sentiment, rounding

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

Suggested Citation

Clarkson, Peter and Nekrasov, Alexander and Simon, Andreas and Tutticci, Irene, Target price forecasts: Fundamental and non-fundamental factors (June 1, 2015). Available at SSRN: https://ssrn.com/abstract=2104433 or http://dx.doi.org/10.2139/ssrn.2104433

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 Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60607
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)

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