Target Price Accuracy: International Evidence

Abstract

This paper shows that analysts exhibit differential and persistent ability to issue accurate target prices (TPs), and that institutional and regulatory differences across countries affect TP accuracy. Using a sample of 16 countries, we find that better past TP forecasters, analysts with higher forecasting experience, following more firms, country-specialized, and employed by a large broker issue more accurate TPs. Further, the country's institutional and regulatory factors, such as the accounting disclosure quality, the origin of the legal system, cultural traits, and IFRS regulation explain cross-country differences in TP forecast accuracy.

Analysts' Consensus and Target Price Accuracy: A Study in Latin America

“…Da and Schaumburg (2011) used the target price as a predictor of share mispricing variation in a sector. Bilinski et al (2013) point out that the target price reflects market expectations, and the forecasts related to them are higher than the forecasts based on price past performance (i.e. realized returns).…”

“…Among the information generated by analysts, Bilinski et al (2013) highlight that the target prices reflect the estimate they make for the level of a company share price for a 12-month period, providing more easily-understood information for investment decisions. The authors observed that, on average, the accuracy of target prices is greater than the accuracy of share price forecast, and is correct or exceeds accuracy in 74.5% of the cases, and also presents superiority to other pricing measures, such as those obtained from the price-profit index of the sector and the return of market price of the 12 preceding months.…”

“…However, evidence about target prices is limited and often contradictory, providing results which highlight the potential relationship between earnings per share (EPS) and target price accuracy, while other studies note that the low accuracy of target prices is greater for those which predict strong price increases, for bigger companies, and for companies with greater coverage (Bilinski et al, 2013;Gleason & Mills, 2008). Barber et al (2001) demonstrate that investors who are willing to buy and sell, thereby incurring transaction costs, would be better off buying stocks of companies which present a consensus of more favorable recommendations, and selling stocks of the ones with less favorable ratings.…”

“…When considering target prices, Bilinski, Lyssimachou and Walker (2013) observed that, in studies on analysts' traits, reputation aspects and tendency to consensus also apply to the analyses regarding the accuracy of target prices. The authors highlight that analysts who produced better past BAR, Rio de Janeiro, v. 14, n. 4, art.…”

“…However, it is discussed in the literature that the target price presents relevant predictive and informational power (Bilinski, Lyssimachou, & Walker, 2013;Da & Schaumburg, 2011), which is used in this paper as a construct for analysis of the consensus effects in the market. Therefore, considering the economic and reputation incentives that lead analysts to be inclined toward consensus, this paper intends to expand the discussion of the consequences of the effect of consensus in the market, discussing specifically the effects on target prices.…”