The asymmetric mispricing information in analysts’ target prices

Review of Accounting Studies, forthcoming.

41 Pages Posted: 14 Aug 2020 Last revised: 26 Sep 2022

See all articles by Jeremiah Green

Jeremiah Green

Texas A&M University - Department of Accounting

John R. M. Hand

University of North Carolina Kenan-Flagler Business School

Anywhere (Siko) Sikochi

Harvard University - Business School (HBS)

Date Written: September 26, 2022

Abstract

We study the mispricing information present in the target prices of US and international analysts. We hypothesize that asymmetry in the value-relevance of the information that managers supply to analysts, combined with asymmetry in the incentives facing analysts to curry favor with managers, leads to analyst-claimed undervaluation being more predictive of future stock returns than analyst-claimed overvaluation. Our empirical tests isolate analyst-claimed mispricing by first removing analysts’ estimates of the cost of equity from the returns implied by target prices and then separating analyst-claimed undervaluation from overvaluation. We find that target prices only predict future returns (at 16 cents to 18 cents on the dollar) when analysts claim undervaluation, not when they claim overvaluation. We also observe that analyst-claimed undervaluation predicts future returns more strongly after firms experience low returns and when macro-driven valuation uncertainty is low.

Keywords: Analysts, target prices, mispricing, cost of equity

JEL Classification: G12, G17, M41

Suggested Citation

Green, Jeremiah and Hand, John R. M. and Sikochi, Anywhere, The asymmetric mispricing information in analysts’ target prices (September 26, 2022). Review of Accounting Studies, forthcoming., Available at SSRN: https://ssrn.com/abstract=3651247 or http://dx.doi.org/10.2139/ssrn.3651247

Jeremiah Green

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

John R. M. Hand

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-3173 (Phone)
919-962-4727 (Fax)

Anywhere Sikochi (Contact Author)

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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