Subjective Valuation and Target Price Accuracy
43 Pages Posted: 30 Oct 2012 Last revised: 30 Oct 2014
Date Written: December 19, 2012
How do analysts develop their forecasts? In this paper, we analyze how sell-side analysts estimate target prices and show that they consistently employ subjective adjustments to baseline models. For a panel of analyst reports, we show that target price forecasts that deviate significantly from simple multiple-based pseudo-target prices are (ex-post) more accurate. By controlling for various stock and broker characteristics, we also demonstrate that our results are not driven by the degree of sophistication of the valuation models. Furthermore, we show that investors know about this increased informativeness of forecasts as the abnormal market return around target price revisions is significantly higher if analysts deviate from simple pseudo-target prices when issuing their forecasts.
Keywords: Target prices, equity research, forecast accuracy, multiple valuation, pseudo-target prices, boldness
JEL Classification: G14, G19, G24, M41
Suggested Citation: Suggested Citation