A multi-dimensional assessment of the accuracy of analyst target prices

Abstract

This paper provides the first assessment for the quality of analyst target forecasts within an emerging market. We find that analysts' target forecasts tend to commit systematically upward bias (9.4%), large absolute pricing error (24.8%), over-prediction of the actual price changes (21%), and a low proportion (54%) of correct directional forecasts. The forecasting quality decays over time as the information in the target prices becomes obsolete, long before the one-year expiry period indicated in the analyst reports. Nevertheless, analysts’ target forecasts consistently outperformed alternative forecasts generated solely based on historical data, which confirms the price discovery function of analyst forecasting. A number of factors are found to be influential to the target performance. Target quality is adversely associated with stock idiosyncratic risk, prior index volatility, the aggressiveness of the target forecasts, and the optimism of consensus targets. In addition, more accurate target prices are delivered by brokerages that have prior experience with the industry and the companies under review, but not by brokerages that possess monopoly power on the stock-specific information.