Subjective Valuation and Target Price Accuracy

43 Pages Posted: 30 Oct 2012 Last revised: 30 Oct 2014

See all articles by Stefano Bonini

Stefano Bonini

Stevens Institute of Technology - School of Business

Alexander Gabriel Kerl

University of Giessen - Department of Financial Services

Date Written: December 19, 2012

Abstract

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

Bonini, Stefano and Kerl, Alexander Gabriel, Subjective Valuation and Target Price Accuracy (December 19, 2012). Available at SSRN: https://ssrn.com/abstract=2168856 or http://dx.doi.org/10.2139/ssrn.2168856

Stefano Bonini (Contact Author)

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

Alexander Gabriel Kerl

University of Giessen - Department of Financial Services ( email )

Licher Str, 74
Giessen, 35394
Germany

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