Abstract
This paper examines the effect of earnings transparency on analysts’ target price forecast properties. The issuance of target price forecasts by financial analysts is a very recent event and target price forecasts are regarded as the most summarized and explicit estimate of the postulated future value of the firm.The sample consists of financial analysts’ forecasts of annual target price issued for firms listed on U.S. stock exchanges from 2001 to 2017. We measure each firm’s earnings transparency as the contemporaneous co-movement between firm’s earnings and change in earnings and stock returns, consisting in industry-specific and -neutral components in earnings-returns relation.Our results show that target price forecasts for more transparent earnings are less biased and more tend to attain the actual stock prices. These results demonstrate that earnings transparency is positively related with analysts’ target price forecasts. Our empirical results corroborate that more transparent accounting information help the market participants in forming more accurate and attainable forecasts. Our study extends the body of research studying the relation between analysts’ forecast properties and the usefulness of accounting information by investigation target price forecasts.
Highlights
We study the effect of earnings transparency on analysts’ target price forecast properties
These results demonstrate that earnings transparency is positively related with analysts’ target price forecasts
Compared to other analysts’ forecast products (i.e., annual earnings and cash flow forecasts and stock recommendations), the issuance of target price forecasts by financial analysts is a relatively recent event and studies on target price forecasts have steadily increased as their issuances of target price forecasts grow
Summary
We study the effect of earnings transparency on analysts’ target price forecast properties. Stock returns indicate the degree of accounting (earnings) information explains firm value changes. TRANSPARENCY is defined as the contemporaneous co-movement between firm’s earnings and change in earnings and stock returns. In other words, it measures how much accounting (earnings) information explains firm value changes. As earnings are more transparent, they have higher explanatory power in describing firm value changes, inducing less information asymmetry. Our sample consists of financial analysts’ forecasts of annual target price issued for firms listed on U.S stock exchanges from 2001 to 2017. Target price forecasts issued for firms with more transparent earnings are less biased and these forecasts are more achievable, more likely to meet or to be above the actual stock prices, at the end of their forecast horizon
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