Do Sell-Side Analysts Exhibit Differential Target Price Forecasting Ability?

Abstract

We examine the overall and individual analyst performance of 12-month-ahead target price forecasts over the 10-years, 2000-2009. Implied target price-based returns exceed actual returns by an average of 15%, and absolute target price forecast errors average 45%. At the end of the 12-month forecast horizon, only 38% of target prices are met, but 64% are met at some time during the forecast horizon. We find statistically significant but economically weak evidence of persistent differential abilities by sell-side analysts to forecast target prices. Target price announcement period return analyses indicate no differential market reactions to analysts’ target price revisions conditional on their recent target price forecast performance, consistent with the market understanding that analysts have at best limited abilities to persistently provide accurate target price forecasts.

Keywords: Analysts, Target Prices, Earnings Forecasts, Valuation

JEL Classification: E37, G10, G24, G29