Do analysts' target prices stabilize the stock market?

  • If target prices are reflective of the true value of a stock, they should correctly reflect the market’s over- and underpricing, that is, be negatively associated with investor sentiment. However, empirical evidence of Clarkson et al. (2020) finds the opposite. Prior research offers two competing explanations for why target prices may not be informative: (1) analysts’ optimism, and (2) analysts’ use of less sophisticated valuation methods. We examine the effect of the interrelation between investor sentiment, target price optimism, and the analyst’s inferred use of sophisticated valuation methods on the informativeness of target prices. Contrary to conventional wisdom that believes target price optimism would always weaken the informativeness of target prices, we find that when investor sentiment is low, target price optimism has a positive effect on the informativeness of target prices. Analysts’ continuous target price optimism drives target prices away from fundamentals in highIf target prices are reflective of the true value of a stock, they should correctly reflect the market’s over- and underpricing, that is, be negatively associated with investor sentiment. However, empirical evidence of Clarkson et al. (2020) finds the opposite. Prior research offers two competing explanations for why target prices may not be informative: (1) analysts’ optimism, and (2) analysts’ use of less sophisticated valuation methods. We examine the effect of the interrelation between investor sentiment, target price optimism, and the analyst’s inferred use of sophisticated valuation methods on the informativeness of target prices. Contrary to conventional wisdom that believes target price optimism would always weaken the informativeness of target prices, we find that when investor sentiment is low, target price optimism has a positive effect on the informativeness of target prices. Analysts’ continuous target price optimism drives target prices away from fundamentals in high sentiment, while optimistic target prices are closer to intrinsic values in low sentiment. Target price informativeness is highest for target prices that are inferred to be based on more sophisticated valuation methods during periods of low sentiment. In high sentiment, however, the informativeness of target prices is close to zero, irrespective of the valuation methods used. This suggests that analysts’ optimism works in favor of the informativeness in low sentiment but is distortive in high sentiment. Further, market reactions to target price revisions do not reflect the higher informativeness in low sentiment. Rather, investors overreact to target price revisions in high sentiment, potentially fueling bubbles.show moreshow less

Export metadata

Statistics

Number of document requests

Additional Services

Share in Twitter Search Google Scholar
Metadaten
Author:Markus BuxbaumGND, Wolfgang SchultzeORCiDGND, Samuel L. Tiras
Frontdoor URLhttps://opus.bibliothek.uni-augsburg.de/opus4/85102
ISSN:1556-5068OPAC
Parent Title (English):SSRN Electronic Journal
Publisher:Elsevier BV
Type:Article
Language:English
Year of first Publication:2021
Release Date:2021/04/06
Issue:25 Mar 2021
DOI:https://doi.org/10.2139/ssrn.3772279
Institutes:Wirtschaftswissenschaftliche Fakultät
Wirtschaftswissenschaftliche Fakultät / Institut für Betriebswirtschaftslehre
Wirtschaftswissenschaftliche Fakultät / Institut für Betriebswirtschaftslehre / Lehrstuhl für Wirtschaftsprüfung und Controlling
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Latest Publications (not yet published in print):Aktuelle Publikationen (noch nicht gedruckt erschienen)