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An Empirical Analysis of Analysts' Target Prices: Short-term Informativeness and Long-term Dynamics

Authors

  • Alon Brav,

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    • Brav is at Duke University and Lehavy is at University of Michigan. We thank Jeff Abar-banell, Ravi Bansal, Tim Bollerslev, Jennifer Francis, Joel Hasbrouck, David Hsieh, Jack Hughes, S. P. Kothari, Charles Lee, Roni Michaely, Michael Roberts, seminar participants at University of California-Irvine, University of Illinois-Champaign, University of North Carolina at Chapel Hill, University of Minnesota, Tel-Aviv University, The Interdisciplinary Center Herzlyia, Israel, University of Toronto, and Purdue University for their comments, and we thank Mark Carhart and Ken French for providing the factor time series. We also thank the following individuals for their insights: Stan Levine from First Call, Jennifer Lyons from Lend Lease Rosen Real Estate Securities, LLC, Jim Wicklund from Dain Rauscher, Inc., Ralph Goldsticker from Mellon Capital Management, Len Yaffe from Bank of America Securities, and Peter Algert from Barclays Global Investors. We owe special thanks to John Graham, Campbell Harvey, Brett Trueman, and Richard Willis for many invaluable insights and comments. All remaining errors are ours.
  • Reuven Lehavy

    Search for more papers by this author
    • Brav is at Duke University and Lehavy is at University of Michigan. We thank Jeff Abar-banell, Ravi Bansal, Tim Bollerslev, Jennifer Francis, Joel Hasbrouck, David Hsieh, Jack Hughes, S. P. Kothari, Charles Lee, Roni Michaely, Michael Roberts, seminar participants at University of California-Irvine, University of Illinois-Champaign, University of North Carolina at Chapel Hill, University of Minnesota, Tel-Aviv University, The Interdisciplinary Center Herzlyia, Israel, University of Toronto, and Purdue University for their comments, and we thank Mark Carhart and Ken French for providing the factor time series. We also thank the following individuals for their insights: Stan Levine from First Call, Jennifer Lyons from Lend Lease Rosen Real Estate Securities, LLC, Jim Wicklund from Dain Rauscher, Inc., Ralph Goldsticker from Mellon Capital Management, Len Yaffe from Bank of America Securities, and Peter Algert from Barclays Global Investors. We owe special thanks to John Graham, Campbell Harvey, Brett Trueman, and Richard Willis for many invaluable insights and comments. All remaining errors are ours.

Abstract

Using a large database of analysts' target prices issued over the period 1997–1999, we examine short-term market reactions to target price revisions and long-term comovement of target and stock prices. We find a significant market reaction to the information contained in analysts' target prices, both unconditionally and conditional on contemporaneously issued stock recommendation and earnings forecast revisions. Using a cointegration approach, we analyze the long-term behavior of market and target prices. We find that, on average, the one-year-ahead target price is 28 percent higher than the current market price.

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