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  • BBA_SSRN

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Do formal risk assessments improve analysts’ target price accuracy?

Research output: Working paper

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Abstract

Equity analysts’ target price estimates are uncertain. Some analysts gauge this uncertainty by supplementing their target prices with a risk assessment in the form of a bull–bear analysis (BBA). We explore whether disclosing a BBA reduces analysts’ target price error or, alternatively, whether analysts disclose a BBA to make their forecasts seem more credible and distract attention from less accurate target prices. Using propensity score matching to control for selection bias, combined with a difference-in-differences estimation to allow for company- and analyst-specific effects, we estimate the effect of supplementing target prices with a BBA on the target price accuracy of US stocks. We find that target prices are significantly more accurate, both statistically and economically, when analysts supplement them with a BBA. Our results shed light on the role of risk and uncertainty assessments in improving analyst valuations.