What Drives Target Price Forecasts and Their Investment Value?

Da, Zhi; Hong, Keejae P.; Lee, Sang‐Woo

doi:10.1111/jbfa.12176

Cited by 42 publications

(18 citation statements)

References 45 publications

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“…Gleason et al () find that inferior earnings forecasts reduce the profitability of target prices. Da et al () find that the investment value of target prices derives in part from analysts’ superior ability to forecast earnings. Call et al () show that the accuracy of analyst earnings forecasts improves in the presence of cash flow forecasts.…”

Section: Research Hypothesesmentioning

confidence: 99%

Do Analysts’ Cash Flow Forecasts Improve Their Target Price Accuracy?

Hashim

Strong²

2018

Contemporary Accting Res

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The literature on the usefulness of analysts’ cash flow forecasts is unsettled, with Call et al. (), Mohanram (), and Radhakrishnan and Wu () providing evidence in favor of their usefulness, and Givoly et al. (), Bilinski (), and Ecker and Schipper () questioning this. Target prices provide a good setting to test the usefulness of cash flow forecasts because they are an ultimate output of an analyst's valuation process to which cash flow forecasts are an input. Moreover, studying the effect of cash flow forecasts on target prices is more relevant for assessing their usefulness than is studying their effect on earnings‐forecast accuracy, as the accuracy of target prices requires a comparison with market prices, which are less subject to management influence than reported earnings. By improving an analyst's understanding of unexpected accruals and permanent earnings, a cash flow forecast can increase an analyst's target price accuracy and signal an analyst's superior forecasting ability. We examine whether, conditional on their earnings forecasts, analysts’ cash flow forecasts improve their target price accuracy. We find that when analysts issue cash flow forecasts, their target price accuracy increases. We also find that this accuracy increases with the accuracy of their cash flow forecasts. Finally, we find that this increased target price accuracy is greater for more challenging‐to‐value firms. Our study provides confirmatory evidence of the usefulness of analysts’ cash flow forecasts.

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Section: Research Hypothesesmentioning

confidence: 99%

Do Analysts’ Cash Flow Forecasts Improve Their Target Price Accuracy?

Hashim

Strong²

2018

Contemporary Accting Res

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“…And Bradshaw et al (2013) find no evidence of persistence in forecasting accuracy of target prices. On the contrary, covering data from 16 countries, Bilinski et al (2013) provide evidence that analysts have differential and persistent skill to issue accurate target price forecasts More recent studies on target price focus, either on the determinants of target prices (Da et al, 2016) or on exploring possible relationship between their accuracy and a variety of analysts, markets, accounting systems (Bradshaw et al, 2019), firm or governance (Cheng et al, 2019) characteristics among others, happily ignoring the fact most evidence point to possible very low accuracy levels .…”

Section: Literature Overviewmentioning

confidence: 99%

Accuracy of European Stock Target Prices

Almeida

Gaspar

2020

SSRN Journal

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Equity researches are conducted by professionals, who also provide buy/hold/sell recommendations to investors. Nowadays, target prices determined by financial analysts are publicly available to investors, who may decide to use them for investment purposes. Studying the accuracy of such analysts' forecasts is, thus, of paramount importance. Based upon empirical data on 50 of the biggest (larger capitalisation) European stocks over a 15-year period, from 2004 to 2019 and using a panel data approach, this is the first study looking at overall accuracy in European stock markets. We find that Bloomberg's 12-month consensus target prices have no predictive over future market prices. Panel results are robust to company fixed effects and sub-period analysis. These results are in line with the (mostly US-based) evidence in the literature. Extending common practice, we perform a comparative accuracy analysis, comparing the accuracy of target prices with that of simple capitalisations of current prices. It turns out target prices are not better in forecasting, than simple capitalisations. More interestingly, by analysing also the relationship between both measures-target prices and capitalised prices-we find evidence that capitalised prices partially explain how target prices are determined. Even when considering individual regressions, accuracy is still very low, but varies considerably across stocks.

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“…First, it contributes to the relatively thin literature on the information role of analyst target prices. Previous studies on target prices generally focus on the reaction of markets to target price revisions, the investment value and accuracy of target prices, or whether analysts can consistently provide accurate targets (Asquith et al, 2005;Bilinski et al, 2013;Brav & Lehavy, 2003;Da et al, 2016;Engelberg et al, 2020;Gleason et al, 2013). We contribute to this area by providing evidence of the investment value of target prices in the focused context of corporate M&A.…”

mentioning

confidence: 95%

“…6 Having examined the informativeness and investment values of target prices, we investigate what drives the information value of target prices. Da et al (2016) suggest that the usefulness of target prices is driven by two components: Short-term earnings forecasts and price-to-earnings ratio forecasts. To examine whether these components can explain the information value of target prices to firm managers and shareholders, we add the short-term earnings forecast to our models.…”

mentioning

confidence: 99%

The information content of target price forecasts: Evidence from mergers and acquisitions

Brownen-Trinh

2021

Business Fin & Account

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This paper investigates the informativeness and value relevance of analyst target prices in the context of mergers and acquisitions. Our results indicate that firms with high 12-month ahead target prices relative to current stock prices are more likely to become a takeover target and offer premium, and acquirers' announcement returns are positively associated with firms' target price premium. We also show that a long-short trading strategy formed on target prices and firms' takeover likelihood generates economically significant returns. Our results are robust to a battery of additional analysis, and the informativeness of target prices is not subsumed by other analyst forecast outputs such as earnings forecasts and recommendations. Overall, our findings suggest that analysts convey valuable information through target price forecasts, which are useful for participants in the corporate takeover markets.

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What Drives Target Price Forecasts and Their Investment Value?

Cited by 42 publications

References 45 publications

Do Analysts’ Cash Flow Forecasts Improve Their Target Price Accuracy?

Do Analysts’ Cash Flow Forecasts Improve Their Target Price Accuracy?

Accuracy of European Stock Target Prices

The information content of target price forecasts: Evidence from mergers and acquisitions

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