NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Information in Equity Analyst Reports

"The market reaction to revisions in price targets is stronger than to an equal percentage change in an analyst's earnings forecasts."

In recent years, significant attention has been paid to the relationship between analysts' stock reports and the performance of individual stocks covered in those reports. These reports provide independent information to the capital markets. In Information Content of Equity Analyst Reports (NBER Working Paper No. 9246), authors Paul Asquith, Michael Mikhail, and Andrea Au find that equity markets react significantly and positively to changes in analysts' recommendation levels, earnings forecasts, and price targets.

The market reaction to revisions in price targets is stronger than to an equal percentage change in an analyst's earnings forecasts. When analysts' earnings forecast are issued, the market takes into account the strength of the analysts' arguments. The stronger the justifications for the analysts' recommendations, the larger the market's reaction to the report. The market tends to discount good news and amplify bad news when the brokerage is not independent of the firm.

The authors also find that investors place greater reliance on security analysts' reports when they are reiterations or downgrades, as opposed to upgrades. Again, the strength of the analysts' arguments and the price target revision account for a significant proportion of the observed market reaction in these cases.

Analysts correctly predict price targets slightly over half of the time. When the predicted price target is missed, the average maximum or minimum price observed for projected increases or decreases is 84 percent of the price target.

The authors also find that there is no systematic association between the security valuation method used by a particular analyst and either the market's reaction or the probability of that analyst achieving the predicted price target.

The authors used 1,126 complete reports written by 56 "All American" analysts from 11 different investment banks, covering 46 industries during the period 1997-9. The reports include 262 upgrades, 739 reiterations, and 125 downgrades. The authors acknowledge the potential for selection bias, since only those firms willing to make their reports publicly available are included in this analysis.

-- Les Picker


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