The Information Content of Target Price Forecasts: Evidence from Mergers and Acquisitions
Forthcoming Journal of Business, Finance and Accounting https://onlinelibrary.wiley.com/doi/abs/10.1111/jbfa.12521
62 Pages Posted: 25 Mar 2021
Date Written: September 26, 2020
This paper investigates the informativeness and value relevance of analyst target prices in the context of mergers and acquisitions (M&A). Our results indicate that firms with high 12-month ahead target prices relative to current stock prices are more likely to become a takeover target and offer premium and acquirers’ announcement returns are positively associated with firms’ target price premium. We also show that a long-short trading strategy formed on target prices and firms’ takeover likelihood generates economically significant returns. Our results are robust to a battery of additional analysis, and the informativeness of target prices is not subsumed by other analyst-forecast outputs such as earnings forecasts and recommendations. Overall, our findings suggest that analysts convey valuable information through target price forecasts, which are useful for participants in the corporate takeover markets.
Keywords: Target price, analyst forecast, mergers, acquisitions, takeover likelihood, offer premium
JEL Classification: G14, G24, G34
Suggested Citation: Suggested Citation