Direction When It’s Needed Most: Analysts’ Target Price Forecasts after Accounting Misstatements
62 Pages Posted: 30 Nov 2021
Date Written: September 6, 2021
In this paper I investigate whether analysts' target price forecasts (TPFs) provide investors with useful direction after material accounting misstatements. I examine the magnitude, informativeness, and accuracy of analysts’ TPF revisions after misstatements. First, analysts revise their TPFs downward after misstatements. The magnitude of analysts’ downward TPF revisions exceeds that which is implied by their earnings forecast revisions alone, indicating that analysts increase their discount rate estimates after misstatements. Discount rate revisions have a larger effect than earnings forecast revisions upon analysts’ TPFs. Second, I find that analysts' TPF revisions remain are associated with cumulative abnormal returns across a variety of misstatement types, suggesting that investors are comfortable with relying on analysts’ interpretations of the effects of misstatements. I examine the source of the informativeness of analysts’ TPFs and find that the informativeness of analysts’ TPFs appears to be driven by analysts’ discount rate estimates rather than their earnings forecasts. Finally, I find no evidence that analysts’ TPFs for misstatement firms are less accurate than their TPFs for control firms. In all, my evidence indicates that analysts’ TPFs provide investors with a unique and valuable source of direction when it’s needed most.
Keywords: Analysts, Misstatements, Target Price Forecasts, Earnings Forecasts
JEL Classification: M40, M41, M43, G14, G29
Suggested Citation: Suggested Citation