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Buy-and-hold abnormal return for portfolios ranked by TP/ P
Buy-and-hold abnormal return for portfolios ranked by ∆TP/P

3.0 2.65

2.0 1.60
Market-Adjusted Return

0.57 1.43
1.18 1.03




Lowest 2 3 4 5 6 7 8 9 Highest

Portfolios deciles by target price level/revision

Figure 1. Average buy-and-hold abnormal return around announcements of target
prices.This ¢gure depicts average buy-and-hold abnormal returns for the period from two
days prior to through two days subsequent to the announcement of target price for decile
portfolios ranked on the basis of two target price information measures. Abnormal re-
turns are computed as the di¡erence between the ¢rm buy and hold return and the buy
and hold return on the NYSE/AMEX/Nasdaq value weight index.The information content
measures are (a) the ratio of target price to preannouncement stock price (stock price out-
standing two days prior to the announcement of the target price), denoted (TP/P), and (b)
the change in the individual brokerage house target price scaled by preannouncement
stock price, denoted (DTP/P).To avoid a possible cross-correlation problem caused by iden-
tical return observations, we delete all but one of identical return observations within
each portfolio.

The visual evidence in Figure 1 indicates that average abnormal returns
around target price revisions are increasing in the favorableness of the
target price and its revision. For example, the average abnormal return for port-
folios ranked on the basis of the ratio of announced target price to the stock
price outstanding two days prior to the announcement, TP/P, ranges from an
average of À 1.66 percent for the least favorable target price revision to 1.03
percent for the most favorable one. A larger spread in abnormal returns is asso-
ciated with portfolios ranked on the basis of the revision in the individual broker-
age house target price, with average abnormal returns ranging from À 3.96
percent to 3.21 percent for the least and most favorable revisions, respectively.
1944 The Journal of Finance

While unreported, di¡erences in average abnormal returns are highly statisti-
cally signi¢cant.11
Combining these ¢ndings with those in the extant literature of a signi¢cant
positive (negative) price reaction to favorable (unfavorable) stock recommenda-
tions (e.g., Stickel (1995), Womack (1996)) and earnings forecast revisions (Givoly
and Lakonishok (1979), Elton, Gruber, and Gultekin (1981), Lys and Sohn (1990),
Francis and So¡er (1997)) provides preliminary evidence that investors perceive
analyst price targets as informative signals regarding a ¢rm™s value. Further-
more, it raises an interesting question regarding the incremental information
content of target prices in the presence of recommendation and earnings forecast
revisions. We therefore extend our analysis, in Section II.B, below, to determine
whether target price revisions are incrementally informative.

B. Informativeness of Target Prices Conditional on Stock Recommendation and
Earnings Forecast Revisions
Table III provides regression results relating event-day abnormal returns to re-
commendation changes, earnings forecast revisions, and the target price revi-
sion measure DTP/P. We begin by regressing event-day abnormal returns (AR)
on three recommendation revision categories, earnings forecast revision, DF/P,
and target price revision DTP/P.12 Our goal is to determine whether target price
revisions are informative, controlling for recommendation and earnings forecast
revisions. The regression takes the form

þb þg þe °1Þ

where the indicator variablesFUPGRADES, DOWNGRADES, REITERA-
TIONSFtake the value 1 if the stated recommendation revision is met and 0
The regression results reported in column 1 of Panel A indicate that target
price revisions are positively and signi¢cantly related to event-day abnormal re-
turns (g ¼ 3.705 with t-statistic ¼ 38.7), controlling for the information in the asso-
ciated stock recommendation and earnings forecast revisions. Economically, a

In unreported results we perform two robustness tests. In the ¢rst, we examine whether
earnings announcements drive the documented average returns around target price an-
nouncements. Toward this end, we exclude from the abnormal return calculation observations
that fall within a ¢ve-day window of an earnings announcement. The results are qualitatively
the same. (This result is also consistent with Womack (1996), who ¢nds that the majority of
recommendation changes are not in response to earnings releases.) In the second test, to ac-
count for the possibility that the documented abnormal return is caused by other ¢rm-speci¢c
events immediately prior to the target price announcement, we calculate abnormal returns
starting at day 0 through day þ 2. The results remain unchanged.
We exclude from the analysis sell or strong sell recommendations because of the small
number of such observations.
Table III
Relative Informativeness of Analyst Target Price, Stock Recommendation, and Earnings Forecast Revisions
The sample consists of all target price announcements between January 1997 and December 1999. The table reports regression results in which
the dependent variable is the market-adjusted buy-and-hold abnormal return around target price announcements and the independent variables
are indicator variables for analyst recommendations, target prices, and earnings forecast revisions. The recommendation indicator variables

An Empirical Analysis of Analysts™ Target Prices
assume the value of 1 for the relevant recommendation revisions and 0 otherwise. The recommendation categories are upgrades, downgrades,
and reiterations.We also report p-values of tests of equality of the regression coe„cients. Abnormal return is computed as the di¡erence between
the ¢rm buy-and-hold return and the buy-and-hold return on the NYSE/AMEX/Nasdaq value-weight index over the period beginning two days
prior to and ending two days subsequent to the target price announcement. Earnings forecast revision is computed as the percentage change in
the brokerage house current and prior annual earnings forecast scaled by the preannouncement stock price.Target price revision is measured as
the change in the brokerage house target price, scaled by the preannouncement stock price.We winsorize the earnings forecast and target price
revision variables at the 1st and 99th percentiles to mitigate the possible e¡ect of extreme observations and verify that regression results are not
sensitive to in£uential observations.

Direction of Recommendation Revision Sign of Target Price Revision

Variable All Observations Upgrades Downgrades Reiterations Positive Negative Zero
(1) (2) (3) (4) (5) (6) (7)

a1 (Recommendation upgrade indicator) 2.966 2.702 4.311 0.919 1.210
21.3 18.6 25.7 2.7 3.7
À 3.001 À 2.493 À 6.357 À 1.799
a2 (Recommendation downgrade indicator) 0.048
À 20.5 À 15.9 À 26.8 À 5.9
À 1.510
a3 (Recommendation reiteration indicator) 0.375 0.376 1.571 0.132
À 16.2
12.1 12.1 29.0 2.7
b (Earnings forecast revision) 1.103 1.078 0.967 1.093 1.018 0.932 1.033
30.8 4.8 7.9 28.7 12.7 17.4 15.8
g (Price target revision) 3.705 6.278 8.094 3.330 1.787 0.678
38.7 14.8 18.1 33.1 12.9 3.1
Adjusted R2 5.5% 6.6% 13.2% 3.2% 9.5% 11.5% 1.1%
N 70,852 3,176 2,896 64,780 27,561 17,239 26,052

(continued )
Table III Continued
p-values of Tests of Equality of Regression Coe„cients

All Observations Recommendation Revision Target Price Revision
(Column 1) (Columns 2 ^ 4) (Columns 5 ^7)

a1 ¼ a2 ¼ a3 0.000
b(Upgrade) ¼ b(Downgrade) ¼ b(Reiteration) 0.619
b(Upgrade) ¼ b(Reiteration) 0.948
b(Downgrade) ¼ b(Reiteration) 0.327
g(Upgrade) ¼ g(Downgrade) ¼ g(Reiteration) 0.000
g(Upgrade) ¼ g(Reiteration) 0.000
g(Downgrade) ¼ g(Reiteration) 0.000

The Journal of Finance
a1(Positive) ¼ a1(Negative) ¼ a1(Zero) 0.000
a2 (Positive) ¼ a2 (Negative) ¼ a2(Zero) 0.000
a3(Positive) ¼ a3(Negative) ¼ a3(Zero) 0.000
b(Positive) ¼ b(Negative) ¼ b(Zero) 0.382
g(Positive) ¼ g(Negative) 0.001
An Empirical Analysis of Analysts™ Target Prices 1947

one standard deviation increase in DTP/P increases the event-day abnormal
return by 0.783 n 3.705 ¼ 2.9 percent, on average. Moreover, it can be seen that
revisions in both earnings forecasts and stock recommendations are infor-
mative as well. The positive and signi¢cant coe„cient on DF/P indicates that
the information in the earnings forecast revisions is not completely subsumed
by either the target price revisions or the stock recommendations. The coe„-
cients a1, a2, and a3 and their expected ordering (a2oa3oa1) provide evidence that
these recommendation revisions are incrementally informative. We easily reject
the joint hypothesis that these parameters are equal with an F test (p-
The regression results provide interesting evidence regarding the role that tar-
get prices and earnings forecast revisions play in the case of recommendation
reiterations. Earlier work (e.g., Barber et al. (2001)) has shown that recommenda-
tion reiterations are the least informative, as is evident in the economically small
magnitude of the intercept associated with recommendation reiterations
(a3 ¼ 0.375, t-statistic ¼ 12.1). In such reiterations, it appears that investors rely
mostly on the information conveyed by the target prices and the earnings forecast
Next, we investigate whether the regression resultsFand, in particular, the
conclusions regarding the role of target price revisionsFare sensitive to the type
of recommendation and target price revisions. For example, when controlling for
the information in earnings forecast revisions, is the market response to target
price revisions similar when recommendations are upgraded, reiterated, or
downgraded? Or, is the market response similar after positive and negative tar-
get price revisions? Toward this end, we conduct two more sets of regressions. In
the ¢rst, we condition on the direction of the recommendation revision (columns
2 ^ 4), whereas in the second we condition on the sign of the target price revision
(columns 5 ^7).
Consider ¢rst the regression results when we condition on the type of recom-
mendation revision (upgrades, downgrades, and reiterations). It can be seen that
target price revisions are associated with larger abnormal returns when analysts
issue recommendation downgrades (g ¼ 8.094, t-statistic ¼ 18.1) relative to either
reiterations or upgrades. Indeed, the coe„cient g associated with recommenda-
tion downgrades is signi¢cantly larger than the one associated with recommen-
dation upgrades or reiterations. The asymmetric reaction is consistent with
the view that, given analysts™ reluctance to issue unfavorable recommendation

In additional analysis, we estimate separate regressions similar to the one in column 1 for
each recommendation reiteration category. While the coe„cient estimates on the price target
and earnings forecast revision are signi¢cant and in the expected sign, the intercept estimate
(i.e., the average abnormal return), while economically small, is signi¢cant and positive for
both strong buy and buy reiterations and is signi¢cant and negative only for hold reiterations.
This ¢nding suggests that the positive coe„cient on recommendation reiterations in column 1
of Panel A is driven primarily by events in which recommendation reiterations were either
strong buy or buy. Further evidence on the role of recommendation revisions is given in the
1948 The Journal of Finance

revisions, investors perceive downgrades as a more credible signal.14 We also ¢nd
that bFthe slope on the earnings forecast revisionFis not statistically di¡erent
across the three recommendation revisions. Since an earnings forecast is a key
input to the derivation of the target price along with an assumed ¢nancial ratio
(Asquith et al. (2002)), this evidence suggests that when analysts issue a recom-
mendation downgrade, investors view the chosen magnitude of the ¢nancial ra-
tio (i.e., multiple) as more informative.
In our second set of regressions, we repeat the same analysis as above but now
condition on the sign of target price revision (columns 5 ^7). Our goal is to gain
further insight into the relation between abnormal returns and target price revi-
sions in these speci¢c settings.We ¢nd that the slope coe„cient of positive target
price revisions (column 5) is signi¢cantly larger (p-value ¼ 0.001) than that of ne-
gative revisions (column 6).15 We also ¢nd that the estimated slope coe„cients on
the earnings forecast revisions are similar across the three groups, consistent
with the results in columns 2 ^ 4.
Third, consider the intercept coe„cients that capture the average abnormal
return resulting from the recommendation revisions.These estimates provide in-
formation on the degree of consistency in investor reaction when revisions in re-
commendations and price targets are reinforcing or countervailing. As expected,
abnormal returns associated with recommendation upgrades (downgrades) are
economically and statistically the largest when such revisions coincide with po-
sitive (negative) target price revisions. For example, when target prices are re-
vised upward (column 5), a1, the intercept that captures the abnormal return
due to recommendation upgrades, equals 4.311 and is signi¢cantly larger than


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