Target Price Accuracy

This study analyzes the accuracy of forecasted target prices which are disclosed by leading investment banks within their analysts’ reports on German stocks for the period from 2002 to 2004. We compute a measure for target price forecast accuracy that evaluates the ability of analysts to exactly forecast the ex-ante (unknown) 12-months stock price. Overall, the target price forecasting accuracy is 73.64%. Our main contribution is to determine factors that explain this target price accuracy. When focusing on analyst-specific differences, target price forecasts that highly deviate from current stock prices (since analysts are overly optimistic) are, ex-post, less accurate. On the contrary, target price forecasts issued by analysts who also provide a detailed rationale in their report are marginally more accurate compared to less thoroughly researched reports. With respect to firm-specific factors, analysts are more successful in forecasting 12-months stock prices for large companies. However, analysts do worse when forecasting target prices for highly volatile and risky stocks. Finally, we show that analysts working for highly reputable banks are more successful when issuing positive target price forecasts compared to the average analyst. Potential conflicts of interests between analyst and covered company, however, do not bias forecast accuracy.