Understanding the Determinants of Analyst Target Price Implied Returns

54 Pages Posted: 8 Mar 2015 Last revised: 3 Mar 2020

See all articles by Patricia Dechow

Patricia Dechow

USC Marshall School of Business

Haifeng You

Hong Kong University of Science & Technology (HKUST) - Department of Accounting

Date Written: February 16, 2020

Abstract

We investigate the determinants of analysts’ target price implied returns and the implication of our findings for investment decision-making. We identify four broad sets of factors that help explain the cross-sectional variation in target price implied returns: future realized stock returns, errors in forecasting fundamentals, errors in forecasting the expected return to risk, and biases relating to analysts’ incentives. Our results suggest that all four sets help explain target price implied returns, with errors in forecasting the expected return to empirical risk proxies having the greatest impact. Collectively, these variables explain nearly a quarter of the cross-sectional variation in target price implied returns. We use our model to predict the optimistic bias in target price implied returns and evaluate whether investors correctly ignore the predictable bias. The results suggest that investors make similar valuation errors to analysts and/or do not perfectly back out the predicted bias in target prices.

Keywords: target price forecasts, implied return, future return, risk, growth, forecast errors, stock volatility, predictable bias, financial analysts, incentives, trading strategy, market efficiency

Suggested Citation

Dechow, Patricia and You, Haifeng, Understanding the Determinants of Analyst Target Price Implied Returns (February 16, 2020). Available at SSRN: https://ssrn.com/abstract=2574727 or http://dx.doi.org/10.2139/ssrn.2574727

Patricia Dechow (Contact Author)

USC Marshall School of Business ( email )

Los Angeles, CA 90089-0441
United States

Haifeng You

Hong Kong University of Science & Technology (HKUST) - Department of Accounting ( email )

Clear Water Bay
Kowloon
Hong Kong

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