Consensus Analyst Target Prices: Information Content and Implications for Investors

47 Pages Posted: 21 Oct 2019

See all articles by Asa Palley

Asa Palley

Indiana University - Kelley School of Business - Department of Operation & Decision Technologies

Thomas D. Steffen

Yale University School of Management

Frank Zhang

Yale School of Management

Date Written: October 10, 2019

Abstract

Consensus analyst target prices are widely available online at no cost to investors. In this paper we consider whether these consensus target prices are informative for predicting future returns. We find that when considered in isolation, consensus target prices are not generally informative about future returns. However, we find that the dispersion of individual analysts’ target prices that comprise the consensus is an important moderating factor. When dispersion is low (high), there is a strong positive (negative) correlation between predicted returns based on the consensus target price and future realized returns. Further analyses suggest that this phenomenon is partially due to consensus target prices being slow to reflect bad news. In addition, we show that the negative correlation between consensus-based predicted returns and future realized returns for high-dispersion stocks exists only for stocks with high short interest or low institutional ownership, suggesting that limits to arbitrage play a role in the observed mispricing and that unsophisticated investors are negatively impacted by high consensus target prices.

Keywords: analyst forecast, target price, stock return, dispersion, retail investors

JEL Classification: G11, G12, G14, G23, G41, M41

Suggested Citation

Palley, Asa and Steffen, Thomas D. and Zhang, Frank, Consensus Analyst Target Prices: Information Content and Implications for Investors (October 10, 2019). Available at SSRN: https://ssrn.com/abstract=3467800 or http://dx.doi.org/10.2139/ssrn.3467800

Asa Palley

Indiana University - Kelley School of Business - Department of Operation & Decision Technologies ( email )

Hodge Hall 4100
1275 E 10th St.
Bloomington, IN 47405
United States

Thomas D. Steffen (Contact Author)

Yale University School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Frank Zhang

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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