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

Jan Klobucnik, Daniel Kreutzmann, Soenke Sievers and Stefan Kanne
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Jan Klobucnik: CGS, University of Cologne
Daniel Kreutzmann: University of Cologne
Soenke Sievers: University of Cologne
Stefan Kanne: University of Cologne

No 03-03, Cologne Graduate School Working Paper Series from Cologne Graduate School in Management, Economics and Social Sciences

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. 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.

Keywords: analyst; recommendation; target price; stock performance (search for similar items in EconPapers)
JEL-codes: G12 G17 G24 (search for similar items in EconPapers)
Date: 2012-02-28
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