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

Tao Li, Wenxiu (Vince) Nan and Jahangir Sultan

Applied Economics, 2023, vol. 55, issue 42, 4890-4910

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.

Date: 2023
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DOI: 10.1080/00036846.2022.2131722

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