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Internal Relevance between Analysts’ Forecasts and Target Prices - Informativeness and Investment Value

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  • Tao Li
  • Wenxiu (Vince) Nan
  • Jahangir Sultan

Abstract

Analysts’ decision-making process, through which they use earnings and non-earnings forecasts to provide their target price revisions, remains opaque. Based on the decision tree analysis, we develop a new multivariate information metric, Internal Relevance (IR), to measure the extent to which the revisions of analysts’ consensus earnings and sales forecasts are incorporated into the revisions of consensus target prices. We show that stocks with higher IR have stronger market reactions to target price revisions in terms of abnormal return, abnormal trading volume, and abnormal return volatility. These results remain consistent across a series of robustness checks. Finally, we perform portfolio analysis to show that IR can be used to screen stocks to improve trading profitability.

Suggested Citation

  • Tao Li & Wenxiu (Vince) Nan & Jahangir Sultan, 2023. "Internal Relevance between Analysts’ Forecasts and Target Prices - Informativeness and Investment Value," Applied Economics, Taylor & Francis Journals, vol. 55(42), pages 4890-4910, September.
    • Handle: RePEc:taf:applec:v:55:y:2023:i:42:p:4890-4910
    DOI: 10.1080/00036846.2022.2131722
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    Cited by:

    1. Joana Almeida & Raquel M. Gaspar, 2023. "Portfolio Performance of European Target Prices," JRFM, MDPI, vol. 16(8), pages 1-28, July.

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