This thesis presents three essays on analyst target prices. The essays contribute to the major debate on the value of analyst target prices in the capital market by addressing the following three questions: Does a bull-bear valuation analysis increase the accuracy of analysts’ target prices? Does analyst ranking affect how informative target prices are to institutional investors? And, do analysts use their cash flow forecasts when setting target prices?In the first essay, I explore whether conducting a bull–bear analysis (BBA) increases target price accuracy. A bull–bear analysis is a risk assessment tool that analysts use to enhance the credibility of their valuations and limit target price uncertainty. Using propensity score matching to control for selection bias, combined with a difference-in-differences estimation to allow for company- and analyst-specific effects, I estimate the effect of supplementing target prices with a BBA on the target price accuracy of US stocks during 2008–2009. The results suggest that target prices are more accurate when analysts supplement them with a BBA. The findings contribute to the literature exploring the determinants of analyst ability to produce accurate target prices. The second essay examines whether analyst ranking status affects institutional investors’ decisions to incorporate target price information into their investment strategies. Evidence shows that market participants value analyst target prices. There is limited evidence, however, on how target price revisions influence the decisions of sophisticated investors. The examination of this study is relevant for the economic question: Does analyst reputation mitigate or exacerbate the conflicts of interest that analysts face? Consistent with institutional investor trades being based on superior information, I observe differences in the information content of target price revisions by star and non-star analysts. Additionally, a duration analysis shows that the quality of analyst target price revisions significantly increases the hazard of analysts losing their star ranking.In the final essay, I examine whether analysts’ decisions to issue cash flow forecasts depend endogenously on their decision to use these forecasts to set target prices. Using an endogenous switching regression model, with analyst report regimes of disclosure and non-disclosure of cash flow forecasts, I find that cash flow revisions are more important than earnings revisions in explaining the magnitude of target price revisions in the cash flow disclosure regime. Cash flow forecasts influence and are influenced by analyst valuation choices. Additional analysis shows that cash flow-based pseudo-target prices play a greater role in explaining target price implied returns than do earnings-based pseudo-target prices. These findings provide insights into analysts’ valuation decision processes and their sophisticated valuation input choices.
| Identifer | oai:union.ndltd.org:bl.uk/oai:ethos.bl.uk:559355 |
| Date | January 2012 |
| Creators | Hashim, Noor |
| Contributors | Strong, Norman |
| Publisher | University of Manchester |
| Source Sets | Ethos UK |
| Detected Language | English |
| Type | Electronic Thesis or Dissertation |
| Source | https://www.research.manchester.ac.uk/portal/en/theses/three-essays-on-analyst-target-prices(023aaef9-95b9-4529-9bac-d2e45ef13bdf).html |
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