Target Price Accuracy Research Articles

Are analysts’ Forecasts Reliable? A Machine Learning-Based Analysis of the Target Price Accuracy

This paper examines the accuracy of target price forecasts made by sell-side analysts, focusing on predicting target price accuracy using machine learning approaches. Utilizing a dataset of target price forecasts for U.S. listed companies from 1999 to 2021, we employ ensemble methods and incorporate market-level, firm-level, and analyst-level information to predict target price accuracy in terms of target price errors and target price achievement. The long-short portfolio constructed based on our predictions significantly outperform the benchmark in terms of cumulative return and Sharpe ratio.

Physician Group Practices Accrued Large Bonuses Under Medicare's Bundled Payment Model, 2018-20.

The Bundled Payments for Care Improvement Advanced Model (BPCI-A), a voluntary Alternative Payment Model for Medicare, incentivizes hospitals and physician group practices to reduce spending for patient care episodes below preset target prices. The experience of physician groups in BPCI-A is not well understood. We found that physician groups earned $421million in incentive payments during BPCI-A's first four performance periods (2018-20). Target prices were positively associated with bonuses, with a mean reconciliation payment of $139 per episode in the lowest decile of target prices and $2,775 in the highest decile. In the first year of the COVID-19 pandemic, mean bonuses increased from $815 per episode to $2,736 per episode. These findings suggest that further policy changes, such as improving target price accuracy and refining participation rules, will be important as the Centers for Medicare and Medicaid Services continues to expand BPCI-A and develop other bundled payment models.

A Study on the Target Price Disparate Ratio and the Effect of Disclosure Regulation

This study investigates the determinants of the target price disparate ratio and target price accuracy and the changes by period after controlling for them, to examine the effect of the target price disparate ratio disclosure regulation. The results were as follows. First, the target price disparate ratio has a significant positive(+) effect on the target price error and a negative(-) effect on the target price met. Second, we find that the disparate ratio decreased significantly after the disclosure regulation when the variables were not controlled; however, after controlling for the variables, the disparate ratio increased. Third, the target price error showed no significant change or increase after the disclosure regulation, and the probability of meeting the target price decreased. The results show a significant relationship between the target price disparate ratio and the target price error. Considering this relationship, analysts are expected to improve the target price accuracy by managing the disparate ratio through disclosure regulations. However, this study shows that disclosure regulations are limited, and it is difficult to reduce target price errors and improve the target price accuracy.

The impact of financial restatements on sell-side recommendation accuracy

Financial restatements are considered a drag on earnings quality and in this paper, we assess their relationship with the target price accuracy. We constitute a comprehensive sample of firms from BRICS with sell-side coverage for eleven years. Our results suggest that restatements negatively influence the target price precision. Across the different types of recommendations, we observe the negative relationship to be persistent for firms in Buy and Hold categories, while for the Sell recommendations, the relationship was positive. Overall results remained robust for different constructs of forecast accuracy. These findings have important implications for retail and institutional investors and regulators.

ESG scores and target price accuracy: Evidence from sell-side recommendations in BRICS

ESG profiling of a firm reflects its exposure to various environmental, social, and governance factors, which influence the business dynamics and impact the valuation metrics. In this paper, we evaluate the relationship between ESG scores and the target price precision of sell-side analysts. We employ four different constructs of forecast accuracy on a comprehensive sample of firms with analyst coverage in the BRICS between 2011 and 2021. The results demonstrate that the ESG score positively impacts the target price accuracy, and firms with higher ESG scores have lower forecast errors. The findings remained robust even after segregating the sample based on buy, hold, and sell recommendations. Finally, we report that within ESG, environmental and governance factors largely explain the forecast accuracy while the social aspects were insignificant. The results also suggest that the precision of sell-side analysts is persistent across periods. These findings have important implications for investors.

SUBJECTIVE VALUATION AND TARGET PRICE ACCURACY

In this paper, we analyze how subjective adjustments to baseline models by analysts affect the forecasting accuracy. For a panel of analyst reports, we show that target price forecasts that deviate significantly from simple multiple-based pseudo-target prices are (ex-post) more accurate. By controlling for various stock and broker characteristics, we also demonstrate that our results are not driven by the degree of sophistication of the valuation models. Furthermore, we show that investors know about this increased informativeness of forecasts as the abnormal market return around target price revisions is significantly higher if analysts deviate from simple pseudo-target prices when issuing their forecasts.

Board of directors and target price performance: evidence from Tunisia

PurposeThis article examines the link between the structure of the board of directors and target price accuracy using a sample of 51 listed firms on the Tunisian Stock Exchange over the period of 2011–2017.Design/methodology/approachIn this study, the authors used the generalised method of moments (GMM) model to control the endogeneity problem.FindingsAs a result, that model can serve as a signal in the forecasting process. The authors' results suggest that target price accuracy is negatively related to board independence, and dual Chief Executive officer (CEO). In addition, CEO compensation tends to exert a negative impact on target price error.Practical implicationsThe authors' findings are valuable for common investors because the findings can be useful in enhancing their capital allocation decisions by assigning higher weights to forecasts issued by firms with strong corporate governance systems. The authors' study also has practical implications for managers and policymakers. Specifically, the evidence provided herein suggests that firms with strong corporate governance mechanisms enhance the accuracy of market expectations, alleviate information asymmetry, and limit market surprises, especially in a context characterised by weak investor protection. The authors' results highlight the advantages of strong corporate governance in improving a firm's information environment and, therefore, are useful for the cost–benefit analysis of improving internal governance mechanisms. Additionally, the authors' results may prove useful to investors who can rely on the information provided by analysts for well-governed companies.Social implicationsThe authors' study contributes to the literature in both corporate governance and analysts' forecasts fields. The study provides additional evidence of the benefit of board quality attributes on target price accuracy in an emerging market characterised by high information asymmetry and weak investor protection. The authors' findings exhibit the effectiveness of board attributes in producing better financial information quality in Tunisia. This is useful for investors who may improve their capital allocation decisions by assigning greater weights to target price forecasts of companies with good governance quality, suggesting that good corporate governance is a credible signal of better financial information quality. These results have important implications for capital market regulators and corporate management in encouraging the implementation of good governance practices.Originality/valueThe authors attempted to assess whether corporate governance of listed firms are priced in the Tunisian context characterised by weak governance control and to highlight which mechanism is highly considered by independent financial analysts to build their forecasts.

How valuation approach choice affects financial analysts’ target price accuracy

This paper examines which valuation approaches financial analysts use to value a company and whether the chosen valuation approach affects the target price accuracy. To address these questions, we conduct content analyses of 867 hand-collected analyst reports on German publicly listed companies published between January 2014 and June 2017. We find that sell-side analysts more frequently use the single-period market approach when formulating target prices, followed by the multi-period income approach, and a mixture of both by combining the results, the so-called hybrid valuation approach. Additionally, we show that 612 of the analyzed analyst reports are based on a holistic valuation methodology instead of a sum of the parts valuation technique. Both univariate and multivariate analyses emphasize that the choice of valuation approach is significantly associated with the accuracy of price targets. Specifically, the income and market approach lead to significantly more accurate target prices compared to the hybrid approach. We also find that the target price accuracy is higher when analysts apply the holistic rather than the sum of the parts valuation approach to determine the fundamental value of the company. Additional results emphasize that target price accuracy improves when analysts use the sum of the parts valuation that bases solely on market or income approaches rather than hybrid approaches. Hence, we contribute to theory and practice by providing evidence on the link between the choice of valuation approach and the analysts’ target price accuracy as well as on the performance of certain valuation techniques.

Does corporate governance matter for financial analysts? Evidence from Tunisia

This article examines the link between corporate governance mechanisms with both analyst forecasts accuracy and recommendations within the Tunisian Stock Exchange. Based on agency and signaling theories, good governance mechanisms aim to mitigate agency conflicts, and improve corporate transparency. As a result, they can serve as mediators in the forecasting process. Using a sample of 357 firm-year observations, there is a significant relation between governance quality, target price accuracy and recommendations, respectively. One of the most important results is that CEO compensation is an effective mechanism on which analysts can rely when setting their forecasts, especially within the financial sector.

Unregulated corporate financial statements and analysts' target price accuracy: evidence from embedded value reporting by life insurers

Unregulated corporate financial statements and analysts' target price accuracy: evidence from embedded value reporting by life insurers

Unregulated corporate financial statements and analysts' target price accuracy: evidence from embedded value reporting by life insurers

Multiple studies support the value relevance of embedded value (EV) disclosures by life insurance companies. To the best of our knowledge, this is the first paper to examine the impact of EV voluntary disclosure on analysts' target price forecast accuracy. Our findings support the proposition that EV is a valuable supplemental information in and should be of special interest to financial reporting policy makers, financial analysts, managers, and academics. Our analysis suggests that life insurers that currently do not disclose EV should consider disclosing the measure, and financial analysts in the US should encourage US life insurers to disclose EV to support their valuation of life insurers' stocks. We contribute to the extant literature on embedded value, and voluntary disclosures, by providing evidence that suggests that EV disclosure helps improve the accuracy of analyst forecasts.

Analysis of Equity Valuation Models and Target Price Accuracy: An Evidence From Analyst Reports in Indonesia

This study examines whether investment analysts (sell-side) in Indonesia tend to prefer cash-flow-based valuation models over the accrual-based valuation model, how the accuracy of valuation models are used, and whether the use of both valuation models simultaneously for generating target prices can improve accuracy. The researchers conducted a comprehensive content analysis of 99 equity research reports for most companies listed in the LQ-45 index. The results show that in the accrual-based valuation model, in particular, the ratio of stock price to income (P/E) was the most popular valuation model that appeared in equity reports in all sectors. However, from the perspective of the valuation model as the producer of the target price (dominant valuation), discounted cash flow (DCF) was the most popular valuation model used. It was also found that the cash-flow-based valuation model gave the highest accuracy. In addition, the researchers also found significant results in the Chi-square test which showed the use of both valuation models simultaneously could improve the valuation results more precisely by the analysts. This was in line with the intuition that the accrual concept adds value to the relevance of the information to cash flow.

Corporate governance and target price accuracy

The purpose of this study is to examine whether the quality of corporate governance has an impact on target price accuracy. We explore the relationship between target price accuracy and ownership structure, board composition, and disclosure using a sample of 17,334 target price observations in the Taiwan Stock Exchange between 2007 and 2016. We find that strong corporate governance improves target price accuracy. We further show that firms with better corporate governance experience a stronger market reaction to their target price announcements.

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

ABSTRACTThe 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.

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

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.

Factors Mitigating Firm-specific Information Asymmetry and Target Price Accuracy in India

Executive Summary Over the last decade, efforts have been made to improve the quality of financial reporting and corporate governance standards prevailing in emerging markets. Even after 20 years of globalization, emerging markets continue to trade as a separate class ( Bekaert & Harvey, 2014 ). On account of a weak regulatory environment, firm-specific information asymmetry is expected to be on the higher side as compared to developed markets. In such an environment, any factors which mitigate information asymmetry may help improve efficiency of information providers such as equity research analysts. The role of equity research analysts is to process financial information and provide estimates which may be used by investors to make informed investment decisions. This study investigates whether the factors which mitigate firm-specific information asymmetry improve analyst target price accuracy in India. We expect sophisticated financial intermediaries such as equity research analysts to produce more accurate target price forecasts for firms with higher frequency of corporate announcements, higher analyst coverage, and higher foreign institutional holdings. Past research suggests that these three factors reduce information asymmetry and this reduction could possibly help analysts produce superior results. Our results show that higher frequency of corporate announcements creates short-term noise which reduces target price accuracy at the end of one-year forecast horizon. Our findings reveal that higher analyst coverage leads to better flow of firm-specific private information and improves target price accuracy anytime during or at the end of one year. We report that higher foreign institutional holding possibly improves stock liquidity, attracting more traders, which eventually leads to better target price accuracy at the end of forecast horizon. Our key finding is that there is a reduction in firm-specific information asymmetry due to the presence of more number of analysts and higher percentage of institutional holding.

How much does valuation model choice matter? Target price accuracy of PE and DCF model in Asian emerging markets

PurposeThe purpose of this paper is to focus on valuation practices applied by analysts to derive target price forecasts in Asian emerging markets. The key objective of this study is to understand valuation model preference of analysts and to compare the predictive utility of target price forecasts derived through heuristics-driven price-to-earnings (PE) model and theoretically sound discounted cash flow (DCF) model.Design/methodology/approachEach research report in the sample of 502 research reports has been studied in detail to understand the dominant valuation model (PE or DCF) applied by analyst to derive target price forecasts. These research reports have been issued on stocks trading in seven emerging markets including India, Malaysia, Indonesia, Taiwan, Philippines, Korea and Thailand during a six-year period starting 2008. Standard OLS and logit regression analysis has been performed to derive empirical findings.FindingsThe study finds that lower regulatory and reporting standards prevailing in emerging markets have no significant bearing on analyst choice of valuation model (PE or DCF). Time-series analysis suggests that emerging market analysts did not rely upon the usage of DCF model and preferred PE model during and immediately after the financial crisis of 2008. Multivariate regression results show weak evidence that PE model produces better results than DCF model after adjusting for the complexities associated with analyzing emerging market equities. The results imply that PE model, to some degree, is better equipped to capture market moods and sentiment in dynamic emerging markets rather than theoretically sound DCF model.Originality/valueMost past studies on valuation model practices have focused on developed markets and this study provides a fresh perspective on analyst valuation model practices and performance in a new institutional setting of Asian emerging markets. The marginally better predictive utility of PE model as compared to DCF model is possibly a feature limited to Asian emerging markets.

TRAFNOŚĆ CENY DOCELOWEJ A ZAWARTOŚĆ INFORMACYJNA REKOMENDACJI NA GIEŁDZIE PAPIERÓW WARTOŚCIOWYCH W WARSZAWIE

This paper examines target price accuracy conditional on whether the analyst’s report contains a precise valuation model with underlying assumptions, as well as investigates whether target price accuracy is related to the forecast accuracy of the variables used as inputs in the valuation models. The study is conducted based on the analysts’ stock recommendations issued in 2012 for companies listed on the Warsaw Stock Exchange. We find that approximately 67% of analysts’ price targets are achieved within a 12-month period following the release of a report. Only in the case of positive recommendations we can observe that analysts who provide precise valuation model within their reports issue significantly more accurate target prices. We also find that target price forecast error is, on average, lower for reports with more accurate forecasts of such variables used as inputs in the valuation models as revenue, EBIT and net profit but the results are not always statistically significant

Does sophisticated DCF outperform heuristics driven PE? Evidence from India

Purpose PE and DCF are two popular valuation methodologies used by analysts to derive target price forecasts while performing equity research. Recent studies in developed markets show that analysts using sophisticated models like DCF produce more accurate target price forecasts as compared to heuristics driven models like PE. This study investigates if analysts using DCF outperform analysts using PE in an emerging market institutional set up. Design/methodology/approach An in-depth analysis of 392 equity research reports is conducted to understand the dominant valuation model used by analysts to derive target price forecasts. Research reports with clear mention of valuation methodology (PE or DCF) to derive target price forecast are used for the purpose of performing this analysis. Multivariate OLS and logit regression analysis has been conducted to investigate if analysts using DCF outperform analysts using PE to derive target price forecasts. Findings The study finds that analysts using PE produce significantly better short-term results than analysts using DCF i.e. when target price accuracy is measured anytime during forecast horizon of 12 months. However, there is no significant difference in target price performance or target price forecast error of PE and DCF model when analyst performance is measured at the end of the forecast horizon. Practical implications In contrast to results from developed markets, this study does not find evidence of superior target price performance of DCF. On the contrary, results suggest that PE outperforms DCF on the short-term measure of target price accuracy. This study shows that PE model which captures market moods and sentiments effectively is more suitable in dynamic, emerging markets like India. Originality/value Past studies have explored the performance of PE and DCF in developed markets and this study provides fresh empirical evidence on target price accuracy of valuation model from an emerging market like India. The superior short-term target price performance of PE as compared to DCF may be relevant exclusively in emerging markets like India.

Does Equity Research Induced Buying Have Investment Value? Evidence from an Emerging Market

This research investigates the contribution (if any) of sell side analysts towards profitable investment decisions for investors in India. A sample of 1,000 target prices issued with buy ratings issued between 2007 and 2011 is used to investigate if investors have benefitted from these target price forecasts. The accuracy of target price forecasts is assessed by investigating if target price forecasts have been achieved anytime during the forecast horizon of one year. Analysts are found to meet their target price forecasts with 57.6 percent accuracy which is better than 55.6 percent target price accuracy reported from 16 countries. This implies that analysts perform in line with global analyst performance. The findings support the proposition that analyst recommendations with buy ratings have investment value in India and investors can benefit by tracking buy recommendations issued by analysts. The research was developed further and factors affecting target price accuracy for buy recommendations were investigated through regression analysis of panel data. Promoter holding was found to have a significant and negative impact on target price accuracy. This implies that analysts produce less accurate results with companies in which promoters have bigger role in managing company�s resources and share prices. Stocks with high promoter holding indicate the possibility of insider trading to outsmart the market. Further, regression analysis reveals that price to book is significantly and positively linked with target price accuracy. Fund managers believe that emerging market stocks tend to trade at premium to book values as companies have successfully managed their ROE better than cost of capital. The authors infer that analysts outperform with buy ratings on stocks with higher ROE than cost of capital. Analyst optimism was found to significantly reduce target price accuracy. The results with respect to analyst optimism are in line with the results reported from developed markets like Germany. Past research suggests that higher analyst optimism is possibly associated with trade generation and brokerage revenues out of retail clients. The regression results are supported by a battery of tests associated with panel data. The authors conclude by suggesting that investors, to some extent, can rely on equity research in India for profit-making investment decisions in stocks. The key message is that equity research induced buying has investment value in India.