A Re-Examination of Analysts’ Differential Target Price Forecasting Ability

Published in Finance 41(1)

40 Pages Posted: 25 Jul 2019 Last revised: 14 Feb 2020

Date Written: February 2020

Abstract

We challenge the view that persistent differences in accuracy across analysts are proof that analysts differ in their ability to forecast stock prices. We show that these persistent differences in accuracy are driven instead by stock return volatility. Building upon option pricing theory, we construct a measure of forecast quality that controls for stock return volatility and forecast horizon. Contrary to previous studies, which failed to properly account for differences in stock return volatility, our empirical analysis reveals that analysts do not exhibit differences in their ability to forecast stock prices. We show that the accuracy of a target price strongly depends on the stock return volatility and the forecast horizon.

Keywords: Financial analysts, Target prices, Forecasting abilities, Expected accuracy, Persistence of volatility

JEL Classification: G10, G24, G29

Suggested Citation

Roger, Tristan and Fontaine, Patrice C., A Re-Examination of Analysts’ Differential Target Price Forecasting Ability (February 2020). Published in Finance 41(1), Available at SSRN: https://ssrn.com/abstract=3425590

Tristan Roger (Contact Author)

ICN Business School ( email )

13 rue du Marechal Ney
Nancy, 54000
France

Patrice C. Fontaine

Eurofidai (CNRS) ( email )

150, rue de la Chimie - EUROFIDAI UMS CNRS 2748
UGA domaine universitaire
Grenoble Cedex 9, 38058
France

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