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

Abstract

Using a large database of analysts' target prices issued over the period 1997-1999 we examine short-term market reactions to target price revisions 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 unconditionally and conditional on contemporaneously issued stock recommendation and earnings forecast revisions. For example, the spread in average announcement day abnormal returns between the highest and lowest deciles of target price revisions is 7.2 percent. Using a cointegration approach, we analyze the long-term behavior of market and target prices. We find that, on average, the one-year-ahead target price is 28 percent higher than the current market price.