Do formal risk assessments improve analysts’ target price accuracy?

Hashim, Noor and Strong, Norman (2015) Do formal risk assessments improve analysts’ target price accuracy? Working Paper. The Department of Accounting and Finance, Lancaster.

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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.