Does a Bull-Bear Valuation Analysis Increase the Accuracy of Analysts’ Target Prices?

Abstract

Equity analysts’ target price estimates are uncertain. Some analysts attempt to enhance the credibility of their valuations and limit uncertainty by supplementing their target prices with a risk assessment in the form of a bull–bear analysis (BBA). We explore whether conducting a BBA increases target price accuracy and reduces analyst forecast error. Using propensity score matching to control for selection bias, combined with a difference-in-differences estimation to allow for company- and analyst-specific effects, we estimate the effect of supplementing target prices with a BBA on the target price accuracy of US stocks during 2008-2009. The results suggest that target prices are more accurate when analysts supplement them with a BBA. Our findings contribute to the literature exploring the determinants of analyst ability to produce accurate target prices.