The Use of Target Prices to Justify Sell-Side Analysts' Stock Recommendations

Posted: 20 Aug 2002

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Abstract

This study examines a sample of 103 sell-side analysts' reports to document the frequency with which analysts disclose target prices as justifications for their stock recommendations. In addition, I investigate whether the degree of assessed over- or underpricing implied by target prices is related to the favorableness of stock recommendations. I find that analysts use target price justifications in over two-thirds of the sample reports, and higher target prices are associated with more favorable stock recommendations. The most favorable recommendations (and target prices) are more likely to be justified by price-earnings ratios and expected growth while the least favorable recommendations are more likely to be justified with other qualitative statements. Further evidence suggests that analysts actually compute target prices using price-multiple heuristics such as 'PEG.' However, in reports that do not disclose target prices, estimates of target prices based on these heuristics are unable to justify the stock recommendations. Several explanations are proposed, including self-selection biases implying analysts do not disclose target prices when the disclosure would not support the recommendation or when analysts are less certain about underlying earnings forecasts.

JEL Classification: M41, G12, G29

Suggested Citation

Bradshaw, Mark T, The Use of Target Prices to Justify Sell-Side Analysts' Stock Recommendations. Accounting Horizons, Vol. 16, No. 1, March 2002. Available at SSRN: https://ssrn.com/abstract=315048

Mark T Bradshaw (Contact Author)

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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