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

Abstract

Market analysts, by means of issuance of their opinions (earnings per share, target prices, and recommendations), have been the object of several earlier studies. Previous literature identifies analysts as information intermediaries between companies and investors, and identifies their role in reducing the information asymmetry. This study investigates whether the estimated standard deviations of price-target shares issued by capital market analysts are informative, and ascertains whether it is possible to identify smaller errors in analysts' forecasts from the verification of the consensus among them. The study is carried out in Latin American countries, and relies on a database of 23,367 estimates of target-price shares during the period from October 2010 to January 2017. It also takes into account the number of analysts who issued the estimates, the company market value, and the government effectiveness between the countries. The results indicate that the greater the consensus (smaller standard deviation), the smaller the forecast errors. Thus, the standard deviation of target-price estimates presents an informative tool to investors about forecast accuracy. Another important result shows that the greater the government effectiveness, the greater the forecast accuracy of target-price estimates issued by the analysts.