Target price forecasts: The roles of the 52‐week high price and recent investor sentiment

This paper reveals that in addition to fundamental factors, the 52‐week high price and recent investor sentiment play an important role in analysts’ target price formation. Analysts’ forecasts of short‐term earnings and long‐term earnings growth are shown to be important explanatory variables for target prices; equally, the 52‐week high price and recent investor sentiment are also shown to explain target price levels and especially target price biases. Our analysis additionally reveals that analysts place greater weight on these two non‐fundamental factors in settings with greater task complexity and to some extent in those with greater resource constraints. Conversely, on balance, the results suggest that this increased reliance does not translate into an increased impact per unit of each non‐fundamental factor on forecast bias. Finally, our results show that target prices are useful in predicting future stock returns beyond earnings forecasts and commonly used risk proxies. However, in an internally consistent fashion, the informativeness of target prices for future returns is significantly reduced when greater weight is placed on either the 52‐week high or recent investor sentiment in the target price formation process.