The asymmetric mispricing information in analysts’ target prices

Jeremiah Green (), John R. M. Hand () and Anywhere Sikochi ()
Additional contact information
Jeremiah Green: Texas A&M University
John R. M. Hand: UNC–Chapel Hill
Anywhere Sikochi: Harvard University

Review of Accounting Studies, 2024, vol. 29, issue 1, No 25, 889-915

Abstract: Abstract We study the mispricing information present in the target prices of US and international analysts. We hypothesize that asymmetry in the value-relevance of the information that managers supply to analysts, combined with asymmetry in the incentives facing analysts to curry favor with managers, leads to analyst-claimed undervaluation being more predictive of future stock returns than analyst-claimed overvaluation. Our empirical tests isolate analyst-claimed mispricing by first removing analysts’ estimates of the cost of equity from the returns implied by target prices and then separating analyst-claimed undervaluation from overvaluation. We find that target prices only predict future returns (at 16 cents to 18 cents on the dollar) when analysts claim undervaluation, not when they claim overvaluation. We also observe that analyst-claimed undervaluation predicts future returns more strongly after firms experience low returns and when macro-driven valuation uncertainty is low.

Keywords: Analysts; Target prices; Mispricing; Cost of equity (search for similar items in EconPapers)
JEL-codes: G12 G17 M41 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11142-022-09730-z

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