Consensus Analyst Target Prices: Information Content and Implications for Investors

Topic:

 Consensus Analyst Target Prices: Information Content and Implications for Investors

Time&Date: 

  10:00-11:30 pm, 2019/8/13 (Tuesday)

Venue:

  Room 619, Teaching A

Speaker:

 Prof. Frank Zhang (Yale University)

Consensus analyst target prices are widely available online at no cost to investors. In this paper we consider whether these consensus target prices are informative for predicting future returns. We find that when considered in isolation, consensus target prices are not generally informative about future returns. However, we also show that the dispersion of individual analysts’ target prices that comprise the consensus is an important moderating factor. More specifically, when dispersion is low (high), there is a strong positive (negative) correlation between predicted returns based on the consensus target price and future realized returns. Additional analyses suggest that this phenomenon is due to consensus target prices being slow to reflect bad news. Finally, we show that the negative correlation between consensus-based predicted returns and future realized returns for high-dispersion stocks exists only in the presence of low institutional ownership, suggesting that unsophisticated investors are negatively impacted by consensus target price information.