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Analysts’ Target Prices and Stock Recommendations

Author

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  • Jie Zhou

Abstract

In this study, I propose a simple framework to examine the link between analysts’ target prices and their stock recommendations. I hypothesize that the favorableness of stock recommendations is positively associated with the deviation of the ratio of target price to price from the benchmark return. I employ three widely used models to proxy for the benchmark return- the CAPM, Fama and French (1993) 3-Factor Model and Carhart (1997) 4-Factor Model. I find results consistent with my hypothesis. Both contingency table and regression analysis support the prediction that analysts issue more favorable recommendations to stocks with a higher difference between the ratio of target price to price and the benchmark return. I further investigate whether this positive association is due to analysts’ perception about risk or mispricing. I use firm characteristics as the explanatory variables to examine how analysts incorporate them into their outputs. I find evidence that target prices are associated with growth variables the same way as recommendations are. However, I am not able to completely rule out the risk interpretation. Therefore, the mechanism underlying the link between analysts’ target prices and stock recommendations is not conclusive.

Suggested Citation

  • Jie Zhou, 2013. "Analysts’ Target Prices and Stock Recommendations," Accounting and Finance Research, Sciedu Press, vol. 2(1), pages 1-1, February.
    • Handle: RePEc:jfr:afr111:v:2:y:2013:i:1:p:1
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    References listed on IDEAS

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    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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