Valuation Model Use and the Price Target Performance of Sell‐Side Equity Analysts*

Gleason, Cristi A.; Johnson, W. Bruce; Li, Haidan

doi:10.1111/j.1911-3846.2011.01142.x

Cited by 107 publications

(68 citation statements)

References 68 publications

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“…Our effort to explore the sources of the investment value of target prices is especially close to this line of research. Gleason et al (2013) document that the 12-month holding period abnormal returns of portfolios constructed from target prices are greater when analysts appear to rely on more rigorous valuation techniques rather than simple heuristics. 9 While they focus on analysts' choice of alternative valuation models, we stick to the parsimonious valuation model as the basis of our main 9 In a related study, Demirakos et al (2010) examine whether the choice of valuation models affects the accuracy of target prices using analysts' research reports covering 94 UK firms over the period 2002-2004.…”

Section: Related Literaturementioning

confidence: 99%

“…As our base model in equation (1) does not provide a functional specification of P/E ratios in terms of discount rates and growth rates, we need to adopt a more general valuation model which allows us to decompose target prices into three components: short-term earnings forecasts, discount rate forecasts, and growth rate forecasts. To this end, we employ the residual income model (RIM), which Gleason et al (2013) opt for as analysts' rigorous valuation technique. In the Appendix, we provide a detailed account of the variance decomposition based on the RIM.…”

Section: (Ii) Alternative Target Price Model Specificationsmentioning

confidence: 99%

“…5 For example, Demirakos et al (2004) study 104 analyst reports for 26 large UK firms from the beverages, electronics, and pharmaceuticals sectors, and find that analysts' choice of valuation methodology varies across industrial sectors. In a more recent study, Gleason et al (2013) document that some analysts appear to rely on simple heuristics based on valuation multiples while others appear to use more rigorous models such as the residual income model. certain information sources more relevant to target price forecasts for certain types of firms?…”

Section: Introductionmentioning

confidence: 99%

“…Finally, we ask whether the investment value of target prices is mainly driven by analysts' ability to forecast short-term earnings. While there is ample evidence that analysts add value by providing accurate near-term earnings forecasts (Stickel, 1991;Chan et al, 1996;Gleason and Lee, 2003), little is known about their ability to forecast factors implicit in P/E ratio forecasts such as risk and growth prospect. 6 To the extent that analysts' ability to forecast 1-year-ahead earnings exceeds their ability to forecast P/E ratios, we would expect target prices to be more informative when their revisions are caused by revisions in short-term earnings forecasts rather than revisions in P/E ratio forecasts.…”

Section: Introductionmentioning

confidence: 99%

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What Drives Target Price Forecasts and Their Investment Value?

Da¹,

Hong²,

Lee

2016

Business Fin & Account

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Abstract:This paper examines the informativeness of analysts' target price forecasts by relating the investment value of target prices to their primary drivers. Decomposing target price forecasts into near-term earnings forecasts and price-to-earnings ratio forecasts, we show that target price revisions reflect information from both components. In addition, we also find that the relative importance of each component in target price revisions is related to firm characteristics. A portfolio based on target price implied expected returns delivers significant abnormal returns. More importantly, we find that the abnormal returns are associated with both earnings and price-to-earnings forecasts, which suggests that the informativeness of target price forecasts comes not only from analysts' ability to forecast short-term earnings but also from their ability to assess risk and long-term growth prospect implied in price-to-earnings forecasts.

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Section: Related Literaturementioning

confidence: 99%

Section: (Ii) Alternative Target Price Model Specificationsmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

What Drives Target Price Forecasts and Their Investment Value?

Da¹,

Hong²,

Lee

2016

Business Fin & Account

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show abstract

“…We then subtract the buy-and-hold return of the value-weighted Center for Research in Security Prices (CRSP) index for the same period from the buy-and-hold return for the recommended stock. For buy recommendations, we invest $1 in the recommended stock; for hold and sell recommendations, we sell $1 (Ertimur et al, 2007;and Gleason et al, 2009). We measure market-adjusted buy-and-hold returns as:…”

Section: (V) Analysis Of Variation In Profitability Of Analysts' Recomentioning

confidence: 99%

The Use of Earnings Forecasts in Stock Recommendations: Are Accurate Analysts More Consistent?

Simon

Curtis

2011

Business Fin & Account

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We examine how analysts' conflicting incentives to be either accurate or optimistic affect their choice to generate stock recommendations with rigorous valuation models or growth-based heuristics. Consistent with prior research the average analyst recommendation is negatively associated with rigorous valuation models and positively associated with growthbased heuristics, we document that these associations are weakest for the most accurate analysts and strongest for the least accurate analysts. We also find evidence consistent with consistency between recommendations and valuation models underlying the positive future returns from trading on the most accurate analysts' recommendations. Our results are consistent with reputation incentives to be accurate mitigating the use of optimistic growth-based models in generating stock recommendations.

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The HRM–capital market link: Effects of securities analysts on strategic human capital

Krausert

2017

Human Resource Management

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This article develops theory about an agency problem affecting the strategic human capital (SHC) of the firm. It proposes three categories of SHC-related choices managers must make that imply a trade-off between near-and long-term performance. Dispersed shareholding, firm coverage by securities analysts, and their practice of publishing quarterly earnings forecasts are argued to entail a bias in management incentives, shifting the balance in this trade-off toward near-term performance. To restore the balance, securities analysts would need to distinguish transitory from recurring effects of SHC-related choices in their valuation models (e.g., treating certain labor cost savings during cyclical downturns as transitory). Restoring the balance would also require them to anticipate long-term effects in their long-term earnings forecasts (e.g., long-term positive effects of retaining employees with valuable skills during cyclical downturns). The article discusses specific transitory cost effects and long-term effects they could potentially take into account. The skills and incentives needed by analysts to account for such effects are argued to vary across firm segments. K E Y W O R D Sagency theory, corporate governance, financial analysis, high-performance work systems, human capital disclosure, intangibles, intellectual capital disclosure, nonfinancial information, securities analysts, short termism, strategic human capital, temporal effects

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Valuation Model Use and the Price Target Performance of Sell‐Side Equity Analysts*

Cited by 107 publications

References 68 publications

What Drives Target Price Forecasts and Their Investment Value?

What Drives Target Price Forecasts and Their Investment Value?

The Use of Earnings Forecasts in Stock Recommendations: Are Accurate Analysts More Consistent?

The HRM–capital market link: Effects of securities analysts on strategic human capital

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