Irene Tutticci Seminar
- Topic: Target price forecasts: Fundamentals and behavioural factors
Irene Tutticci, Associate Professor in Accounting, UQ Business School, The University of Queensland
- Venue:E4A 623
- When: 13th June, 2014, (Fri)
- Time: 11am - 12pm (Morning Tea from 10.30am)
This paper reveals both fundamental and behavioural factors as playing an important role in analysts' target price formation. Analysts' forecasts of short-term earnings and long-term growth are shown to be important explanatory variables for target prices; equally, the following behavioural factors that are salient but irrelevant to fundamental value are also shown to explain target price levels and especially target price biases: the 52-week high price, recent market sentiment, and rounding. Here, increases in the 52-week high and market sentiment measures of one standard deviation correspond to increases in the positive target price bias of 4.8% and 14.7%, respectively, while rounding of the target price corresponds to an increase of 13.7%. We also find that analysts place greater weight on these behavioural factors in settings with greater task complexity and/or resource constraints, and when they rely on valuation heuristics as opposed to more rigorous valuation methodology, and that this greater weight is associated with increased optimistic bias. Finally, our results show that analysts' target prices are useful in predicting future stock returns beyond earnings forecasts and commonly used risk proxies. However, in an internally consistent fashion, the informativeness of target prices for future returns is significantly reduced when greater weight is placed on either the 52-week high or recent market sentiment in the target price formation process.