An Empirical Analysis of Analysts' Target Prices: Short Term Informativeness and Long Term Dynamics

54 Pages Posted: 15 Apr 2001

See all articles by Alon Brav

Alon Brav

Duke University - Fuqua School of Business; European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Reuven Lehavy

University of Michigan, Stephen M. Ross School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: May 2001

Abstract

Using a large database of analysts' target prices, we examine short-term market reactions to target price announcements and long-term co-movement of target and stock prices. We find a significant market reaction to the information contained in analysts' target prices, both unconditional and conditional on contemporaneously issued stock recommendations and earnings forecast revisions. For example, the spread in average announcement day abnormal returns between positive and negative target price revisions is as high as 7 percent. We also find that stock recommendations and earnings forecast revisions are informative controlling for the information in target prices. Using a cointegration approach, we explore the long-term behavior of market and target prices and estimate the system's long-term equilibrium. In this equilibrium a typical firm's one-year ahead target price is 22 percent higher than its current market price. Finally, while market prices react to the information conveyed in analysts' reports, we show that any subsequent corrections towards the long-term equilibrium are, in effect, done by analysts alone. We provide evidence that the market understands the latter relationship and is therefore able to anticipate, at least partially, analysts' target price revisions.

JEL Classification: G29, G12, G14, M41

Suggested Citation

Brav, Alon and Lehavy, Reuven, An Empirical Analysis of Analysts' Target Prices: Short Term Informativeness and Long Term Dynamics (May 2001). Available at SSRN: https://ssrn.com/abstract=266180 or http://dx.doi.org/10.2139/ssrn.266180

Alon Brav

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
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European Corporate Governance Institute (ECGI) ( email )

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Belgium

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Reuven Lehavy (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI 48109
United States
734-763-1508 (Phone)
734-936-0282 (Fax)

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