Consensus Analyst Target Prices: Information Content and Implications for Investors

43 Pages Posted: 21 Oct 2019 Last revised: 26 Oct 2021

See all articles by Asa Palley

Asa Palley

Indiana University - Kelley School of Business - Department of Operation & Decision Technologies

Thomas D. Steffen

Yale University School of Management

Frank Zhang

Yale School of Management

Date Written: October 25, 2021

Abstract

Consensus analyst target prices are widely available online at no cost to investors. In this paper we examine how the amount of dispersion in the individual target prices comprising the consensus affects the predictive relationship between the consensus target price and future returns. We find some evidence that when dispersion is low, returns predicted by consensus target prices are more positively associated with realized future returns. However, we document a strong negative association between predicted and realized returns for stocks with high target price dispersion. Further analyses suggest that this effect of dispersion reflects distortions from analysts being slow to update price targets after bad news. As a stock performs poorly and some analysts are slow to update their target prices, dispersion increases and the consensus target price becomes too high. This has important implications for the informativeness of the consensus analyst target price. Finally, we show that the negative correlation between consensus-based predicted returns and future realized returns for high-dispersion stocks exists mainly for stocks with high retail interest, suggesting that unsophisticated investors are misled by inflated target prices available freely online.

Keywords: analyst forecast, target price, stock return, dispersion, retail investors

JEL Classification: G11, G12, G14, G23, G41, M41

Suggested Citation

Palley, Asa and Steffen, Thomas D. and Zhang, Frank, Consensus Analyst Target Prices: Information Content and Implications for Investors (October 25, 2021). Available at SSRN: https://ssrn.com/abstract=3467800 or http://dx.doi.org/10.2139/ssrn.3467800

Asa Palley

Indiana University - Kelley School of Business - Department of Operation & Decision Technologies ( email )

Hodge Hall 4100
1275 E 10th St.
Bloomington, IN 47405
United States

Thomas D. Steffen (Contact Author)

Yale University School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Frank Zhang

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
250
Abstract Views
1,830
rank
159,562
PlumX Metrics