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Security analysts’ target prices and takeover premiums

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  • Gerritsen, Dirk F.

Abstract

Most existing studies conclude that the accuracy of analysts’ target prices is questionable. In forecasting target prices, analysts estimate a future stock price under the constraint of a time frame of usually 12months. We exclude this source of uncertainty by focusing on valuations in takeover bids. We show that the expected returns by analysts are significantly related to the takeover premiums paid. A 5 percent higher target price is associated with a 1 percent higher takeover bid. The economic significance increases when we control takeover premiums for estimated synergy gains. Our results support the relevance of analysts’ price forecasts.

Suggested Citation

  • Gerritsen, Dirk F., 2015. "Security analysts’ target prices and takeover premiums," Finance Research Letters, Elsevier, vol. 13(C), pages 205-213.
    • Handle: RePEc:eee:finlet:v:13:y:2015:i:c:p:205-213
    DOI: 10.1016/j.frl.2015.01.002
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    Cited by:

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    5. Bhootra, Ajay, 2018. "Another look at anchoring and stock return predictability," Finance Research Letters, Elsevier, vol. 25(C), pages 259-265.

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    More about this item

    Keywords

    Security analysts; Target prices; Takeover valuation; Mergers; Acquisitions; Anchoring;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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