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From Recommendation Strong Buy Buy Hold Sell/Strong Sell

Strong Buy 45,671 5,692 3,297 77
99% 52% 36% 39%
Buy 6,108 36,823 5,186 114
60% 99% 35% 40%
Hold 2,485 4,315 12,579 427
71% 70% 98% 42%
Sell/Strong Sell 63 86 424 527
56% 60% 41% 92%
No prior recommendation 16,374 15,194 8,622 510
82% 79% 49% 53%

Overall 70,701 62,110 30,108 1,655
91% 88% 66% 61%



number of brokerage houses remains fairly constant over the years, with overall
325 distinct brokerage houses included in the database. Consistent with claims
made by several analysts that certain brokerage houses that issue recommenda-
tions have either a formal or an informal policy barring issuance of price targets,
the number of brokerage houses issuing recommendations is higher than those
issuing price targets.4
Panel C of Table I provides a description of the earnings forecast revision data-
base.The database includes 124,286 earnings forecasts for the period from 1997 to
1999. These forecasts are distributed, on average, as seven forecasts per ¢rm and
pertain to 9,167 distinct ¢rms. These forecast revisions are issued by 282 distinct
brokerage houses, with an average of seven brokers per covered ¢rm.
Finally, while analyst reports always include a recommendation, they do not
necessarily include a target price. In our sample, 135 of 325 brokerage houses do
not issue any target price. Recommendations issued by these 135 brokerage
houses, however, account for about ¢ve percent of all recommendations.5 Panel
4
In unreported results, we ¢nd that the majority of stock recommendations are issued as
either buy or strong buy (68 percent), while only 29 percent are issued as a hold and three
percent as a sell or strong sell. The median number of days between revisions is 59 days for
target prices, 141 days for stock recommendations, and 92 days for earnings forecasts.
5
While we do not study the analyst™s decision to include a target price, we conjecture sev-
eral possible reasons. First, according to conversations with analysts, some brokerage houses
have an explicit policy prohibiting their analysts from issuing target prices. Second, analysts
may choose to withhold the target price in circumstances where their cost of providing an ex
post incorrect price target exceeds the potential bene¢ts from issuing it. For example, if ana-
lyst compensation is related to the trading commissions generated in recommending securi-
ties for purchase and if incorrect target prices were ex post costly, then analysts would tend
to issue target prices mainly with buy rather than with sell recommendations.
An Empirical Analysis of Analysts™ Target Prices 1939

D of Table I provides information on the frequency of inclusion of target prices in
brokerage houses™ reports. The panel provides a transition matrix of brokerage
house stock recommendations (the number at the top of each cell) and the percen-
tage of these recommendations issued with price targets (the number at the bot-
tom of each cell).6 Several interesting regularities are observed in this panel.
First, price targets are overall more likely to be issued along with strong buy or
buy recommendations (91 percent and 88 percent, respectively) than with hold (66
percent) or sell/strong sell (61 percent) recommendations.This is consistent with
¢ndings in Bradshaw (2002). Second, within recommendation categories, recom-
mendation upgrades (lower-left cells) are more likely to be accompanied by a tar-
get price than are recommendation downgrades (upper-right cells). For example,
price targets are included in 70 percent of the upgrade reports from hold to buy
recommendations but only in 35 percent of the downgrade reports from buy to
hold recommendations. This evidence is consistent with the common claim that
analysts are biased toward issuing favorable news and withholding (or minimiz-
ing the amount of) bad news.The statistics on the diagonal indicate that virtually
all recommendation reiterations include a target price, suggesting that analysts
convey new and perhaps more subtle information that does not necessitate a re-
commendation revision via target price revisions.
Finally, the statistics in Panel D indicate that analysts are more likely to initi-
ate or resume coverage with a strong buy or a buy recommendation (see McNi-
chols and O™Brien (1997), Barber et al. (2001)) and are also more likely to include a
target price in these recommendations than with other cases.

B.Variable Descriptions
We construct two alternative measures for the information content of analysts™
target prices.The ¢rst, denoted TP/P, is the ratio of the announced target price to
the stock price outstanding two days prior to the announcement (all prices are
converted to the same split-adjusted basis). Since more than 90 percent of the


6
In computing these statistics, we employ the following procedures: (1) All recommenda-
tions outstanding in the database for more than one year are assumed invalid; (2) The most
recent brokerage house recommendation is assumed to have been reiterated for target price
reports that were not accompanied by a corresponding recommendation observation in First
Call™s recommendation database. The validity of this procedure was con¢rmed with an o„cial
at First Call who indicated that since target price revisions are issued more frequently than
recommendation revisions, many target price revisions are recorded only in the target price
database and, as long as the corresponding recommendation remains unchanged, First Call
does not reiterate the existing recommendation in the recommendation database (see also
Jegadeesh et al. (2001)); (3) Sell and strong sell recommendations were combined because of
their relative rarity in the data; (4) Since some brokerage houses do not issue target price
reports, we include only brokerage house/¢rm combinations with at least one target price re-
port. While results are qualitatively similar, removing the latter restriction reduces the o¡-
diagonal percentages. Note also that the transition matrix excludes recommendations marked
by First Call as revisions from valid to ˜˜dropped.™™ This accounts for the di¡erent number of
observations between Panel D and Panel A in Table I.
1940 The Journal of Finance

target price reports in the database are coded as one-year-ahead prices, this ratio
may be interpreted as the analysts™ stated estimate of the ¢rm™s annual expected
return.The second measure attempts to capture whether investors react to infor-
mation in the announced target price relative to the brokerage house™s prior tar-
get price.This measure, denoted DTP/P, is the di¡erence between the current and
prior target price issued by the same brokerage house, de£ated by stock price out-
standing two days prior to the announcement.7
Panel A of Table II presents statistics on the two information measures as well
as on the target price and earnings forecast revisions. We winsorize these vari-
ables at the 1st and 99th percentiles to mitigate the possible e¡ect of extreme ob-
servations. The statistics indicate that the distributions of both measures are
right skewed. The average (median) target price is higher by 32.9 (25.5) percent
relative to the preannouncement stock price. As a percentage of stock price, in-
dividual brokerage houses™ target prices are 0.8 percent higher than the previous
target price.8 The third column presents additional information on the change in
the brokerage house target price, scaling it in this case by the brokerage house
previous target price, DTP/TP À 1.The average (median) percentage change in tar-
get price is 5.3 (0) percent. Finally, in the fourth column we report summary sta-
tistics for the earnings forecast revision measured as the change in the analyst
forecast of earnings for the current ¢scal year de£ated by the stock price two days
prior to the announcement.The mean (median) forecast revision is À 0.41 ( À 0.03)
percent.
Panels B and C of Table II present additional information both for the level and
change in target prices conditioned on the associated recommendation revision.
In Panel B we report average target prices scaled by preannouncement stock
price, TP/P. In general, the magnitude of the scaled target prices is consistent
with the direction of the recommendation changes. For example, upgrades are
generally associated with higher TP/P ratios than downgrades. Next, in Panel C
we report for each recommendation revision averages of DTP/TP À 1 as well as
average price appreciation over the same period (since the issuance of the preced-
ing target price). It can be seen that the average DTP/TP À 1 and the stock price
appreciation are consistently positive for upgrades and nearly always negative
for downgrades. For example, an upgrade from a buy to a strong buy recommen-
dation is associated with an average upward revision in DTP/TP À 1 of 12.7 per-
cent, whereas a downgrade from a buy to a hold recommendation is associated

7
We have also considered additional measures. The ¢rst is the di¡erence between a broker-
age house™s target price and the outstanding consensus target price immediately prior to the
announcement. Consensus target price was calculated as the average target price outstand-
ing over the previous 90 days across all brokerage houses. Other information measures are
constructed by scaling each of the previous target price revisions by the prior-price standard
deviation, measured over the 90 days preceding the event. We ¢nd qualitatively similar results
in Section II with all of these information measures.
8
In unreported results, we ¢nd that only about ¢ve percent of target price reports are is-
sued below the concurrent stock price, approximately 25 percent of target price reports re-
£ect a downward revision from brokerage houses™ prior reports, and nearly 43 percent of
target price reports re£ect a downward revision from the outstanding consensus target price.
An Empirical Analysis of Analysts™ Target Prices 1941

with a downward revision of À 4.5 percent on average. Similarly, the average
price appreciation over the period preceding the announcement is also consis-
tent with the direction of the recommendation and target price revisions. For
the upgrade from a buy to a strong buy recommendation, the associated stock
price appreciation is 5.1 percent, whereas for the downgrade from a buy to a hold



Table II
Statistics on Target Prices by Analyst Stock Recommendations
This table provides descriptive statistics on the target price information measures. Panel A pro-
vides general distributional statistics on (a) the ratio of target price to preannouncement stock
price (stock price outstanding two days prior to the announcement of the target price), denoted
(TP/P), (b) the change in the individual brokerage house target price scaled by preannounce-
ment stock price, denoted (DTP/P), (c) the percentage change in the brokerage house target
price, denoted (DTP/TP À 1), and (d) earnings forecast revision, computed as the di¡erence in
the brokerage house current and prior annual earnings forecast scaled by preannouncement
stock price. Panel B provides information on the average TP/P conditional on stock recommen-
dation revisions. Panel C reports, for each recommendation revision, averages of DTP/TP À 1 as
well as average price appreciation measured over the same period (since the issuance of the
preceding target price). All prices and earnings are converted to the same split-adjusted basis.

Panel A: Descriptive Statistics on Measures of the Information Content of Target Price

Change in Change in
Brokerage Brokerage
Target Price to House House
Stock Price Target Target
Ratio Price Price Forecast
(TP/P) (DTP/P) (DTP/TP À 1) Revision

À 0.41%
Mean 1.329 0.8% 5.3%
Max 3.004 143.3% 183.3% 35.2%
75th percentile 1.433 9.7% 8.3% 0.16%
À 0.03%
Median 1.255 0.0% 0.0%
À 0.8% À 0.43%
25th percentile 1.146 0.0%
À 136.0% À 89.0% À 422.5%
Min 0.584
Std. Dev. 0.304 78.3% 95.9% 2.5%
N 204,031 115,720 115,720 82,052

Panel B: Average Target Price to Price Ratio (TP/P)

To Recommendation

From Strong Sell/Strong
Recommendation Buy Buy Hold Sell

Strong Buy 1.40 1.30 1.18 1.04
Buy 1.41 1.31 1.12 1.21
Hold 1.37 1.31 1.16 1.01
Sell/Strong Sell 1.42 1.36 1.11 1.03
Initiated/Resumed as 1.43 1.31 1.15 1.07

Overall 1.41 1.31 1.16 1.04
1942 The Journal of Finance

Table II (continued )
Panel C: Average Change in Target Price (DTP/TP À 1) and Corresponding Price Appreciation

To Recommendation

From Strong Sell/Strong
Recommendation Buy Buy Hold Sell

6.4%, 2.5% À 9.9%, À 0.2% À 14.5%, À 3.5%
Strong Buy 6.0%, 5.7%
5.4%, 4.3% À 4.5%, 2.4% À 6.1%, 5.9%
Buy 12.7%, 5.1%
0.6%, 0.01% À 7.2%, À 2.9%
Hold 22.8%, 4.6% 16.4%, 4.4%
0.5%, À 3.5%
Sell/Strong Sell 20.6%, 1.6% 15.6%, 2.1% 11.0%, 0.7%
Initiated/Resumed as NA NA NA NA

4.2% À 0.4%, À 1.7%, À 2.9
Overall 6.6%, 5.6% 5.7%, 0.3%




recommendation, stock prices appreciated on average by 2.4 percent.9 Finally, we
note that in the case of recommendation reiterations, the magnitude of target
price revisions is lower than in recommendation upgrades or downgrades.
We have also calculated statistics, as in Panels B and C, for the variation in
earnings revisions by stock recommendation revisions (unreported). We ¢nd
that, similar to the results in these panels, earnings revisions are monotonically
related to the favorableness of the recommendation change. The fact that revi-
sions in target prices, recommendations, and earnings forecasts occur generally
in the same direction suggests that, to some extent, these signals share much of
the same information content. In Section II we explore whether the information
in each of these signals subsumes the information in any other.



II. Market Reaction to Target Price Announcements
A. Unconditional Informativeness of Target Prices
In this section, we examine whether the information content of target price
announcements is associated with abnormal returns around those announce-
ments. Speci¢cally, we compute the abnormal return around each announcement
and present average abnormal returns for portfolios ranked on the basis of the
magnitude of the relevant information content measure. Abnormal return is com-
puted as the di¡erence between a ¢rm™s buy-and-hold return and the buy-and-hold
return on the NYSE/AMEX/Nasdaq value-weighted market index over the period
beginning two days prior and ending two days subsequent to the ¢rm™s target
price announcement.10 These results are reported in Figure 1.
9
The average contemporaneous market return for all recommendation categories is ap-
proximately three percent.
10
Results for the period of À 1 to þ 1 days around the announcement are qualitatively simi-
lar. Also, to avoid possible cross-correlation problems caused by identical return observations,
we delete all but one of identical return observations within each portfolio.
An Empirical Analysis of Analysts™ Target Prices 1943

5.0

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