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

Author

Listed:
  • Stefan Kanne

    ()

  • Jan Klobucnik

    ()

  • Daniel Kreutzmann

    ()

  • Soenke Sievers

    ()

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, thereby demonstrating asymmetric analyst behavior when adjusting target prices to stock prices. 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 and consider transaction costs. Copyright Swiss Society for Financial Market Research 2012

Suggested Citation

  • Stefan Kanne & Jan Klobucnik & Daniel Kreutzmann & Soenke Sievers, 2012. "To buy or not to buy? The value of contradictory analyst signals," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 26(4), pages 405-428, December.
  • Handle: RePEc:kap:fmktpm:v:26:y:2012:i:4:p:405-428
    DOI: 10.1007/s11408-012-0196-z
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    References listed on IDEAS

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    More about this item

    Keywords

    Analyst recommendation; Target price; Stock performance; Trading strategy; G11; G12; G17; G24;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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