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To buy or not to buy? The value of contradictory analyst signals

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Author Info

  • Jan Klobucnik

    (CGS, University of Cologne)

  • Daniel Kreutzmann

    (University of Cologne)

  • Soenke Sievers

    (University of Cologne)

  • Stefan Kanne

    (University of Cologne)

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    Abstract

    We study the predictive ability of individual analyst target price changes for post-event abnormal stock returns within each recommendation category. Although prior studies generally demonstrate the investment value of target prices, we find that target price changes do not cause abnormal returns within each recommendation level. Instead, contradictory analyst signals (e.g., strong buy reiterations with large target price decreases) neutralize each other, whereas confirmatory signals reinforce each other. Further, our analysis reveals that large target price downgrades can be explained by preceding stock price decreases. However, upgrades are not preceded by stock price increases. Our results suggest that investors should treat recommendations with caution when they are issued with large contradictory target price changes. Thus, instead of blindly following a recommendation, investors might put more weight on the change in the corresponding target price.

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    File URL: http://www.cgs.uni-koeln.de/fileadmin/wiso_fak/cgs/pdf/working_paper/cgswp_03-03.pdf
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    Bibliographic Info

    Paper provided by Cologne Graduate School in Management, Economics and Social Sciences in its series Cologne Graduate School Working Paper Series with number 03-03.

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    Date of creation: 28 Feb 2012
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    Handle: RePEc:cgr:cgsser:03-03

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    Keywords: analyst; recommendation; target price; stock performance;

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