Target Price Accuracy in Equity Research
Journal of Business, Finance and Accounting, Forthcoming
53 Pages Posted: 4 Mar 2005 Last revised: 15 Nov 2015
Date Written: March 15, 2010
Analysts' target prices have received limited attention in academic research. In this paper we try to fill the gap by developing an innovative multi-layer accuracy metric that we test on a novel database. Our analysis shows that forecasting accuracy is very limited: prediction errors are consistent, autocorrelated, non-mean reverting and large (up to 46%). Controlling for market and company factors, we find evidence that factors like inclusion in the market index, market momentum, size and market value are all negatively correlated with accuracy These unexpected results suggest that analysts research is systematically biased which supports theoretical predictions by Ottaviani and Sorensen (2006). Since forecasting is largely an unmonitored activity, market participants may fail in fully understanding this behavior thus not arbitraging away these inefficiencies.
Keywords: Target Prices, Analyst recommendation, security analysis
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation