Independent and Investment-Bank Analysts’ Target Prices

55 Pages Posted: 11 May 2017 Last revised: 10 May 2021

See all articles by Kristian D. Allee

Kristian D. Allee

University of Arkansas - Department of Accounting

Devon Erickson

Utah State University - Huntsman School of Business

Adam M. Esplin

University of Texas at El Paso

Stephannie Larocque

University of Notre Dame - Mendoza College of Business

Date Written: May 10, 2021

Abstract

We provide new evidence on individual analysts’ differential abilities to forecast firm value. We find that independent analysts’ target prices perform well in predicting future price relative to investment-bank analysts. Our evidence suggests that, 12 months after their issuance, independent analysts’ target prices are more likely to be met than those issued by investment-bank analysts in general and are more accurate than the target prices of affiliated investment-bank analysts, controlling for analyst characteristics. We also find that independent analysts’ target prices are more likely to be met for firms with higher stock price momentum. In contrast, we find that the association between realized returns and the returns predicted by target prices does not differ for independent vs. investment-bank analysts. Moreover, independent analysts’ target prices are less likely to be met and are less accurate for firms with higher volatility. Our evidence contrasts with prior literature which generally concludes that independent analysts’ research is of lower quality. Yet, the market appears to react relatively less strongly to independent analysts’ target price revisions. Our findings suggest that investors and researchers can benefit from understanding the properties of independent analysts’ target prices, particularly for certain types of firms.

Keywords: Analysts, Valuation, Forecasts, Independent, Investment Bank

JEL Classification: G3, G17, M4, M41

Suggested Citation

Allee, Kristian D. and Erickson, Devon and Esplin, Adam M. and Larocque, Stephannie A., Independent and Investment-Bank Analysts’ Target Prices (May 10, 2021). Available at SSRN: https://ssrn.com/abstract=2966282 or http://dx.doi.org/10.2139/ssrn.2966282

Kristian D. Allee

University of Arkansas - Department of Accounting ( email )

University of Arkansas
Business Building 458
Fayetteville, AR 72701
United States
479-575-5227 (Phone)

Devon Erickson

Utah State University - Huntsman School of Business ( email )

3540 Old Main Hill
Logan, UT 84322-3540
United States

Adam M. Esplin

University of Texas at El Paso ( email )

500 W University Ave
El Paso, TX 79902
United States

Stephannie A. Larocque (Contact Author)

University of Notre Dame - Mendoza College of Business ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

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