Target Price Accuracy:

International Evidence


Pawel Bilinski, Danielle Lyssimachou and Martin Walker

ABSTRACT: This paper shows that analysts exhibit differential and persistent ability to issue

accurate target prices (TPs), and that institutional and regulatory differences across countries

affect TP accuracy. Using a sample of 16 countries, we find that better past TP forecasters,

analysts with higher forecasting experience, following more firms, country-specialized, and

employed by a large broker issue more accurate TPs. Further, the country’s institutional and

regulatory factors, such as the accounting disclosure quality, the origin of the legal system,

cultural traits, and IFRS regulation explain cross-country differences in TP forecast accuracy.

Keywords: target prices; forecast accuracy; analyst characteristics; institutional and regulatory
differences across countries.
Data Availability: Data are available from public sources indicated in the text.


We thank Michael Brennan, James Ohlson, and Steve Young, and participants at the 2011 European Accounting
Association meeting, the 2011 Financial Management Association European meeting, and the 2012 Financial
Management Association meeting for helpful comments. All errors and omissions are our own. Pawel Bilinski is from
Lancaster University Management School, Danielle Lyssimachou and Martin Walker are from Manchester Business
School. Contact details: [email protected] (P.Bilinski), [email protected] (D.Lyssimachou),
[email protected] (M.Walker).
1
 I. INTRODUCTION
A target price (TP) forecast reflects the analyst’s estimate of the firm’s stock price level in 12

months, providing easy to interpret, direct investment advice.1 Target prices are valuable to

investors2, yet we know little about what determines TP accuracy. In particular, questions such as—

do analysts exhibit differential and persistent ability to issue accurate target prices after controlling

for analyst earnings-per-share (EPS) forecast accuracy, and how institutional and regulatory

differences across countries, e.g. differences in accounting disclosure quality, affect TP forecast

accuracy—have received limited research attention. We examine the two set of factors together

because quality of TP forecasts should reflect both the analyst forecasting skills and the quality of

information signals analysts use to arrive at target prices, where the latter is largely determined by the

institutional and regulatory environment the firm operates in (Hope 2003a, 2003b; Ball et al. 2000).3

We confirm that TP accuracy varies with both the institutional setup that facilities the forecasting

task and with superior analyst skillset, and that on average the former has a stronger effect on TP

accuracy.

Using data from 16 countries—the US, 12 European countries, Japan, Australia and Hong

Kong—over the period 2002–2009, we study the determinants of analyst TP accuracy. We use two

main TP accuracy measures. First, an indicator variable that equals one if the TP forecast is met by

the actual stock price over the 12-month period after the forecast issue, Met_any. We document that

during the 12-month forecast period the stock price reaches the target price in 59.1% of cases, with

Italian firms having the lowest proportion of met TPs, 54.0%, and Australian firms the highest,

1 Our email correspondence with Thomson Reuters IBES support team and Daniel Reingold, a former top analyst at
Credit Suisse First Boston, confirm that a target price reflects the level at which the analyst believes the stock price will
trade at the end of a specific, usually a 12-month horizon.
2 Brav and Lehavy (2003) and Asquith et al. (2005) document strong incremental price reaction to TP revision

announcements in the US, controlling for concurrent stock recommendation and earnings-per-share revisions.
3 An important benefit of the international setting is that we can achieve a high variation in analyst forecasting

environments largely without the cost of high endogeneity. This provides better specification of tests that examine
analyst differential TP forecasting ability in relation to the forecasting environment.
2
66.1%. Our second TP accuracy measure is the absolute difference between the TP forecast and the

stock price at the end of the forecast horizon scaled by the stock price at the forecast issue date,

aTPE. The mean absolute TP error is 44.7%, ranging from 37.3% for Japanese firms to 58.2% for

Danish companies. The distribution in TP accuracy measures remains qualitatively the same when

we recalculate Met_any and aTPE using a shorter forecast period to account for TP revisions made

before the end of the 12-month forecast period.

We examine analysts’ differential and persistent ability to issue accurate target prices in two

steps. First, we compare the accuracy of analyst TPs to the accuracy of simple price forecasts that

investors can form based on information available at the TP issue date. If the accuracy of simple

price forecasts is higher than that of analyst TPs, the latter offer no value to investors. We find that

on average analyst TP forecast accuracy is higher than the accuracy of a naïve price forecast, which

predicts that the stock price in twelve months will be equal to the stock price on the forecast issue

date times one plus the previous 12-month firm buy-and-hold return. Specifically analyst TPs meet

or exceed the accuracy of naïve price forecasts in 74.5% of cases, and the analysts’ absolute TP

forecast error is 9.8% lower compared to the absolute forecast error of the naïve price forecast. The

accuracy of analyst TPs is also superior to other simple price forecasts such as those formed based

on the industry price-to-earnings ratios and the market return over the preceding 12-month period.

Second, multivariate analysis shows that analyst characteristics associated with superior

forecasting skill predict TP accuracy. Analyst firm-specific forecasting experience reduces the TP

forecast error, which means that analysts learn to produce more precise TPs over time for the firms

they follow. However, analyst experience has no effect on the likelihood that a target price is met

over the 12-month forecast horizon. Analysts following more firms issue more accurate TPs based

on both TP accuracy measures. This is consistent with the international evidence on EPS forecast

accuracy in Clement et al. (2003) and Bolliger (2004), and points to the existence of information
3
spill-over effects from following multiple firms. Further, analysts who cover firms located in fewer

countries—country specialized analysts—are more accurate TP forecasters. The evidence that

country-specialization improves TP accuracy complements the results in Sonney (2009), who reports

that country-specialized analysts produce more accurate EPS forecasts. Target prices made by

analysts employed by large brokers, who have access to a greater resource pool, are more likely to be

met over the 12-month forecast period. Finally, looking at the persistence in analyst TP forecasting

ability, we find that better past TP forecasters issue more accurate future TPs.

The relation between analyst characteristics and TP accuracy remains qualitatively similar

when we recalculate Met_any and aTPE to account for TP revisions made before the end of the 12-

month forecast period (Met_any_rev and aTPE_rev). For aTPE_rev, we also observe that TPs issued

by analysts employed by larger brokers have lower TP error. Together, the results confirm that

better quality analysts have persistent and differential ability to issue precise TP forecasts.

Institutional and regulatory environment shows a strong association with TP accuracy. For

all accuracy measures, we find that TP forecasts are more accurate in countries with higher

accounting disclosure quality. For both Met_any and Met_any_rev, TP forecasts in countries where

the legal system originates in common law are more likely to be met by the actual stock price

compared to countries with civil law tradition. This supports the results in Clement et al. (2003) that

the shareholder model of corporate governance in common law countries improves the quality and

amount of information available to analysts, which facilitates their forecasting task. Cross-country

differences in national culture explain variations in TP forecast accuracy. Specifically, TP estimates

issued for firms that operate in countries with high uncertainty avoidance are on average more

accurate. Uncertainty avoidance encourages less risk taking and stability in the working environment

(Bontempo et al. 1997), which simplifies the analyst valuation and forecasting task when producing

TPs. Further, Met_any shows a negative correlation with power distance, individualism, and
4
masculinity. These cultural dimensions associate with market-orientation of firms, high

competitiveness of individuals, acceptance for risk, higher secrecy of managers and more difficult

access to firm management for analysts—characteristics that reflect higher forecasting difficulty.

Finally, we find that TP forecast accuracy improves after the mandatory IFRS adoption for the

fourteen countries in our sample that implemented IFRS starting on January 2005.

All regressions control for the accuracy of analyst EPS forecasts, which shows a positive

association with TP forecast accuracy. This is consistent with better quality inputs into analyst

valuation models improving TP accuracy. The regressions also include firm characteristics that could

predict TP forecast accuracy, such as proxies for the quality of the firm’s information environment

and analyst competition (firm market capitalization and the number of analysts covering the firm),

firm total risk (stock price volatility), and predictable stock price patterns (price momentum). We

also control for the magnitude of the forecasted stock price change, the ex-post stock market

performance, industry and year dummies, and the effect of recent financial crisis. For the latter, the

analysis reveals that TP forecast accuracy is lower in all countries we investigate during the financial

crisis 2007–2009.

Our results are robust to a battery of sensitivity tests. These include using instrumental

variable analysis to adjust for endogeneity in the analyst’s projected price change estimate, using

country fixed-effect regressions, and using the proportional mean absolute TP forecast error as in

Clement (1999, 2003).

This study will be of interest to both academic researchers and market participants. First, to

date, the accuracy of target price forecasts has received limited attention by the literature. This is

surprising considering that TPs provide more direct and granular investment advice to investors

compared to earnings forecasts or stock recommendations. A recent review of the analyst

forecasting literature by Bradshaw (2010) emphasizes this point. His literature search identifies only
5
14 papers on analyst target prices listed in ABI/INFORM, and only three that look at target prices

and earnings forecasts together. In particular, of the three published studies that provide some

evidence on TP accuracy, Asquith et al. (2005) report only summary statistics on TP accuracy, and

Demirakos et al. (2010) and Bonini et al. (2010) do not examine whether analyst and broker

characteristics determine TP accuracy. Bradshaw and Brown (2007), the only other study to examine

persistence in analyst target price forecasting accuracy, find no link between past and current TP

forecast accuracy in the US market over 1997–2002. Our study differs from Bradshaw and Brown

(2007) as (1) we examine a more recent sample period, and (2) we focus on a broader set of analyst

and broker characteristics in explaining differences in TP forecast accuracy.4 Furthermore, none of

the previous studies explore whether differences in institutional and regulatory settings influence TP

accuracy, nor do they control for the contemporaneous relation between EPS and TP accuracy. Our

paper fills this gap in the literature and documents that analysts exhibit differential and persistent

ability to forecast target prices accurately. Further, compared to previous research, our study tests

the largest set of potential TP forecast accuracy predictors providing the most comprehensive

analysis of TP forecast determinants to date.

Second, this study is the first to provide evidence that institutional and regulatory differences

between countries influence analysts’ ability to forecast accurate target prices. Specifically, we show

that institutional factors such as the accounting disclosure quality, the corporate governance system,

4 Differences in sample periods and in model specification most likely explain the discrepancy between ours and results
in Bradshaw and Brown (2007). First, new regulation introduced in the wake of the internet crash and Enron and
World.com accounting scandals aimed to reduce conflicts of interests in analyst research and to promote less biased sell-
side equity research (e.g. NASD 2711 and the SEC rule 472 in the US). This may have motivated analysts to exert more
effort to produce more accurate TP forecasts. Second, tests in Section VII show that the relation between past and
current TP accuracy is strongly attenuated for TP forecasts issued during the financial crisis 2007–2009. This is because
unexpected price decline as a result of subprime crisis had a strong negative effect on TP forecast accuracy. A similar
price shock occurred in the aftermath of the internet bubble burst, a period Bradshaw and Brown (2007) draw majority
of their TP forecasts from (forecasts issued after 2000 make up 64.5% of all TPs in their sample). Third, we find that for
TPs issued for US firms only, the coefficient on past TP accuracy is lower by 14.3% in magnitude for the Met_any
regression and by 6.4% for aTPE regression when we use the TP accuracy model specification in Bradshaw and Brown
(2007) compared to our model specification.
6
cultural traits, and IFRS regulation affects uncertainty analysts face in forecasting future firm value.

This adds important evidence to the literature on the effects the country’s institutional setup has on

capital markets, and in particular, on the properties of analyst research forecasts other than one-year

ahead EPS (Basu et al. 1998; Clement et al. 2003; Hope 2003a, 2003b). For example, Hope (2003b,

237) emphasizes that “[A]lthough accounting researchers extensively explain variations in disclosure

levels among firms and countries, research on the effects of differences in disclosure levels [on

capital markets] is more limited, especially in international settings (Saudagaran and Meek [1997])”.

Thus our study responds to the call by Ramnath et al. (2008, 68), who state that “[F]inally, we expect

to see more international research describing the institutional and regulatory factors that create

cross-country differences in the role of analysts and the properties of their forecasts”.5

Third, the study has important implications for finance and accounting research that

employs target prices: (1) to estimate the equity cost-of-capital (Brav et al. 2005; Botosan and

Plumlee 2002, 2005; Botosan et al. 2011), or (2) as a predictor of within-industry variation in stock

mispricing (Da and Schaumburg 2011). First, identifying more accurate target prices can increase the

precision of the cost-of-capital estimates. Second, tests of association between the equity cost-of-

capital proxies derived from target prices and other variables, e.g. firm size in Brav et al. (2005) and

Botosan and Plumlee (2002, 2005), are subject to the classic error-in-variables problem.

Consequently, we advocate that future research in this field controls for TP accuracy when

estimating the equity cost-of-capital to ensure the consistency of estimates in the subsequent

analysis. Further, studies that derive equity cost-of-capital estimates from TPs implicitly assume (but

do not test) that analyst TPs reflect market expectations and that TP forecasts are superior to simple

5 Our findings should also be of interest to regulators, as TP forecast precision may reflect the level of informational
efficiency of a market and the efficacy of local regulation. Particularly, the evidence that the introduction of IFRS has
improved analysts’ ability to forecast accurate TPs contributes to the international debate on the capital-markets
consequences of this regulation (Byard et al. 2011; Horton and Serafeim 2010; and Preiato et al. 2010).
7
benchmarks based on past price performance (e.g. past realized returns). Our study provides

evidence in support of the latter assumption.

Fourth, the findings are valuable to investors, allowing them to improve their capital

allocation decisions by attaching higher weight to TP forecast revisions by more accurate TP

forecasters. Our results also explain why we should find differences in the usefulness of target prices

to investors across countries. In particular, the results are relevant for studies on the information

content of target prices, as the market reaction to TP revisions should be a function of the forecast

information content and the forecast precision, and for studies on the long-term investment value of

analyst TPs.

The remainder of the paper is organized as follows. Section 2 reviews the relevant literature,

and Section 3 outlines the research design. We describe the data in section 4, and Section 5 reports

the empirical results. Section 6 presents the sensitivity analysis. We explore whether analysts can

persistently issue more accurate target prices in Section 7 and section 8 shows the effect of IFRS

adoption on TP forecast accuracy. We conclude in Section 9.

II. LITERATURE REVIEW

This section first outlines the previous TP accuracy studies that followed from the literature on EPS

forecast precision.6 This is followed by a review of studies that examine the relation between EPS

forecast accuracy and the institutional and regulatory setting that firms operate in.

Compared to EPS forecast accuracy studies, the literature on target price accuracy is much

more recent and substantially less populated. In the US market, Asquith et al. (2005) report that

6 For a comprehensive overview of EPS forecast accuracy studies, see Schipper (1991) and Brown (1993) who review the
early literature in the field, Ramnath et al. (2008) who review the analyst forecasting literature since 1992, and Bradshaw
(2010) for the most recent survey of the literature. As the accuracy of stock recommendations is difficult to quantify, the
research on stock recommendations is centered on their investment value (Womack 1996; Mikhail et al. 2004), and their
relation to EPS accuracy (Loh and Mian 2006).
8
54.3% of target prices by All American analysts made during 1997–1999 are achieved by the stock

price by the end of the 12-month period, and the proportion of met TPs decreases with the forecast

boldness, i.e. the magnitude of the projected price change. Asquith et al. find no relation between

target price accuracy and the valuation model that analysts use to justify target price forecasts.

Bradshaw and Brown (2007) study the persistence in analyst TP forecasting accuracy in the US over

the period 1997–2002. They find that 45% of target prices in their sample are met during the 12-

month forecast period, but find no evidence that analysts have persistent ability to forecast accurate

target prices. Bradshaw and Brown argue that target price accuracy does not factor into analyst

compensation or career prospects, thus analysts have no incentive to issue accurate TPs. In another

study, Gleason et al. (2008) find a positive association between concurrent earnings forecast

accuracy and the investment value of target prices, which highlights the potential link between EPS

and TP accuracy.

The international evidence with respect to target prices is equally limited. In an Italian study,

Bonini et al. (2010) report that target price inaccuracy is larger for TPs predicting strong price

increases, for larger firms, for loss-making ones, and for stocks with better analyst coverage and

stronger momentum. Demirakos et al. (2010) find that after controlling for the difficulty of the

valuation task, TPs derived from discounted cash flow valuation models are relatively more accurate

than TPs produced from price-to-earnings multiples for one out of four TP accuracy measures,

using a sample of 94 UK firms during the period 2002–2004. None of the previous studies examine

whether analysts exhibit differential and persistent ability to issue accurate target prices, controlling

for EPS accuracy and using analyst characteristics that proxy for superior analyst skill.

9
The relation between the institutional and regulatory setting and analyst EPS forecast

accuracy

The evidence on how differences in institutional and regulatory settings across countries, e.g.

differences in reporting quality, affect the accuracy of analyst forecasts is limited. Basu et al. (1998)

were among the first to examine the effects that country-differences in accounting disclosure have

on EPS forecast accuracy. Using a sample of ten countries over 1987–1994, they report that

countries with more frequent and higher quality disclosure have greater earnings forecast accuracy.

Similarly to Basu et al., Hope (2003a, 2003b) reports that the consensus one-year ahead EPS forecast

accuracy improves with high accounting disclosure quality for a sample of 18 and 22 countries

respectively. Hope (2003b) also shows that the EPS forecast error is lower in countries with strong

enforcement of accounting standards. Hope (2003b) concludes that higher quality disclosure

increases analysts’ understanding of the firm’s current and future performance, and stronger

enforcement is more likely to ensure that managers comply with accounting rules, which reduces the

uncertainty that analysts face about managers’ accounting choices in financial statements. However,

contrary to Hope (2003a, 2003b), Preiato et al. (2010) find a negative relation between EPS forecast

accuracy and a self-constructed enforcement index that measures the country’s auditing and

accounting enforcement.

Ball et al. (2000) distinguish between the shareholder model of corporate governance that

dominates in common law countries and the stakeholder model in code law countries. The former

corporate governance system increases investor demand for analyst information and encourages

more extensive firm accounting disclosure. The stakeholder governance model is characterized by

lower demand for public discourse and strong insider communication between management and

various stakeholder groups. Clement et al. (2003) report a stronger relation between broker size and

relative EPS forecast accuracy in common law countries as analysts lever on the large brokers’
10
resource pool and the privileged access to management in translating firm mandatory and voluntary

disclosure into earnings forecasts.

The cultural environment firms operate in can affect analyst and managerial risk attitudes

and choices7, orientation on long- vs. short-term goals and growth (Hofstede 1993, 1994), as well as

firm financial disclosure (Gray, 1998). Using a sample of 10 countries, Clement et al. (2003) report

that analyst general experience has a negative effect on relative EPS forecast accuracy in collectivistic

countries, but does not affect relative EPS forecast error in individualistic countries. They attribute

this result to the emphasis on life-time employment in collectivistic countries, which leads to

entrenchment and reduces incentives for experienced analysts to produce accurate forecasts.

To date, no prior study has investigated how variations in institutional and regulatory

settings across countries influence TP accuracy. This evidence is important because compared to

one-year ahead EPS forecasts, target prices also incorporate the analyst’s long-term assessment of

firm earnings and of firm risk. Regulatory and institutional differences across countries can affect

analysts’ ability to forecast future earnings and risk, having an incremental effect on TP accuracy

beyond their effect on EPS forecast accuracy.

III. RESEARCH DESIGN

We employ two main measures to capture analyst target price accuracy. The first measure is an

indicator variable (Met_any) which is equal to one if the actual stock price, P, reaches the target price,

TP, at any time over the 12-month forecast horizon, and zero otherwise. Met_any is constructed as

follows:

7 Bontempo et al. (1997) find that cross-cultural difference affect risk perception of university students from the US, the
Netherlands, Hong Kong and Taiwan. Kogut and Singh (1988) find that firms from cultures high in uncertainty
avoidance prefer joint-ventures over acquisitions as the former avoids uncertainty about cost and success likelihood of
firm integration.
11
 for TP P  1  0 : Met _ any  1 if TP  P  0 12-month forecast horizon ,
s

Met _ any  0 otherwise

(1)
for TP P  1  0 : Met _ any  1 if TP  P  0 12-month forecast horizon ,
s

Met _ any  0 otherwise

where Ps is the stock price on the forecast issue date. Met_any provides a simple measure of TP

accuracy, but ignores the magnitude of the forecast error. For example, a “conservative” forecast

that predicts a small price increase is more likely to be met over the 12-month period, but may

strongly deviate from the actual stock price at the end of the forecast period. An investor following

a limit-order strategy of selling a stock when it reaches the target price may have to forsake a larger

proportion of a potential profit for a “conservative” forecast compared to a “bolder” forecast that is

closer to the actual stock price at the end of the forecast period.

The second TP accuracy measure, aTPE, measures the magnitude of the forecast error.

aTPE is the absolute difference between the target price and the actual price at the end of the 12-

month forecast horizon, P12, scaled by the stock price at the forecast issue date Ps,

TP  P12
aTPE  (2)
Ps

Intuitively, aTPE reflects the investment error for a limit-order trading strategy. The actual price

overshooting the target price reflects the loss of (potential) income from not holding the stock for

the entire 12-month period; the actual price below the TP shows the difference between the actual

and the expected payoff when holding the stock for 12-months. The absolute TP forecast error

reflects that TPs far above the actual price are equally inaccurate as forecasts far below the stock

price.

The two TP accuracy metrics, Met_any and aTPE, capture forecast accuracy during the 12-

month forecast period and at the end of the 12-month forecast period respectively, providing a

12
more complete assessment of analyst forecasting accuracy compared to using only one forecast

accuracy measure, as is common in EPS accuracy studies

A TP forecast revision made before the end of the 12-month forecast horizon of the

preceding TP means that the preceding TP forecast becomes stale. If the magnitude and the

direction of the new forecast differ from the preceding TP, leaving the forecast horizon of the

preceding TP intact is likely to negatively bias TP accuracy estimates. To account for TP revisions

made prior to the end of the 12-month forecast period, we construct a variation of our two main TP

accuracy measures. We calculate an indicator variable called TP-revision-adjusted Met_any, i.e.

Met_any_rev, which is equal to one if the actual stock price, P, reaches the target price, TP, over the

actual forecast period, i.e. the period from the forecast issue date to the forecast revision date.

Met_any_rev measure is defined as:

for TP P  1  0 : Met _ any _ rev  1 if TP  P  0 actual forecast horizon ,

s

Met _ any _ rev  0 otherwise

(3)
for TP P  1  0 : Met _ any _ rev  1 if TP  P  0 actual forecast horizon ,
s

Met _ any _ rev  0 otherwise

If an analyst does not revise her TP forecast over the 12-month forecast period after the TP issue,

Met_any_rev = Met_any. The TP-revision-adjusted aTPE, aTPE_rev, is defined as:

TP  Prev
aTPE _ rev  (4)
Ps

where Prev is the stock price at the TP revision date. If an analyst does not revise her TP forecast over

the 12-month period after the issue, aTPE_rev = aTPE. Using a simple example, we illustrate the

calculation of the four TP accuracy measures in Appendix I.

13
Explanatory variables

To explain differences in target price accuracy across analysts, we use analyst and broker

characteristics that previous studies associate with EPS forecast accuracy. This is because TP and

EPS forecast accuracy predictors are likely to be correlated as they reflect, primarily, analyst

forecasting skill. We also identify variables related to the country’s institutional and regulatory setting

that can explain between-country variations in TP accuracy. The set of controls include the accuracy

of the EPS forecast, the projected stock price change, and other variables that could explain target

price accuracy. For ease of exposition, we divide the independent variables into five categories: (1)

analyst- and broker-specific variables, (2) institutional and regulatory characteristics, (3) EPS and TP

forecast-specific, (4) firm-specific, (5) and other controls.

Analyst and broker characteristics

We identify four analyst characteristics that previous studies have associated with EPS forecast

accuracy. We use analyst firm-specific forecasting experience (A_exp) as a proxy for analyst

forecasting skill and knowledge gained over time (Clement 1999).8 We calculate the number of firms

(A_#Firm) an analyst follows as Clement (1999) suggests that it is more onerous and complex to

actively follow and produce research reports for a large number of companies. Clement (1999) finds

that analysts who follow more firms produce less accurate EPS forecasts. However, Clement et al.

(2003) and Bolliger (2004) find that outside the US market, analysts who follow more firms produce

more accurate EPS estimates, which suggests that analysts may benefit from information spill-over

effects from following multiple firms. Sonney (2009) reports that country-specialized financial

analysts produce more accurate EPS. We count the number of countries (A_#Count) where the

8 We use analyst firm-specific experience because Clement (1999) reports that analyst firm-specific experience has a
consistent positive relation with EPS accuracy compared to analysts general forecasting experience, which shows a
negative relation with EPS accuracy in his early sample period and only a weak positive association with EPS forecast
accuracy in the latter period.
14
firms followed by the analyst are domiciled to measure the analyst country specialization. The

number of analysts employed by a broker (B_#Ana) reflects the amount of resources available to

analysts. Clement (1999) and Jacob et al. (1999) find that analysts with access to a large resource

pool issue more accurate EPS forecasts.

Institutional and regulatory characteristics

We use three variables to capture variations in the institutional and regulatory environment that may

affect the average TP forecast accuracy. The disclosure index (Disclosure) and the index of

enforcement of accounting standards (Enforcement) are from Hope (2003b) and capture country

variations in the average firm reporting quality and enforcement of accounting standards,

respectively. The disclosure index is based on aggregate annual financial statement disclosure scores

from CIFAR (1993, 1995), and the degree of enforcement of accounting standards is based on a

factor analysis of (1) country-level audit spending, (2) judicial efficiency, (3) rule of law, (4) insider

trading laws, and (5) shareholder protection. We expect analysts to produce more accurate TPs for

firms in countries with high accounting disclosure quality and enforcement. This is because high

annual report disclosure should increase analysts’ understanding of firm current performance, future

earnings outlook and risk, the projections analysts factor in to arrive at target prices.9 Strong

enforcement of accounting standards encourages managers to consistently follow the prescribed

accounting standards and reduces instances of reporting fraud (Hope 2003b), which can reduce the

uncertainty that analysts face about managers’ accounting choices for the current and future

earnings. This may simplify the valuation task analysts use to arrive at target price forecast.

9 For example, Hope (2003a) argues that management discussion and analysis in the annual report can aid analysts in
understanding firm future plans and strategy, and information on planned capital investment can inform analysts about
expected earnings growth.
15
 We use four indicator variables for the origin of the country’s legal system (Legor UK, Legor

GE, Legor FR and Legor SC) to control for quality of corporate governance across countries.10 Ball et

al. (2000) argue that the shareholder governance model in countries with UK legal origin promotes

more timely accounting systems and is characterized by higher investor demand for financial

information, which encourages more voluntary disclosure. This in return should affects the amount

and quality of information available to analysts about firm current and future earnings, their growth

and risk that analysts use in forecasting target prices. Ownership concentration (Owner con) from La

Porta et al. (1998) measures the proportion of shares owned by the three largest shareholders among

the top ten largest privately owned (non-financial) firms in a given country. Ownership

concentration may promote private channels of communication between managers and

blockholders, at the expense of public disclosure (La Porta et al. 2000), which can increases the

information acquisition costs for analysts. This can adversely affect the quality of inputs analysts use

to arrive at target prices. Controlling for enforcement and disclosure, we expect analysts to produce

more accurate TPs in countries with UK legal origin and in countries with more diffused ownership.

We use Hofstede’s (1980) cultural dimensions to control for cultural difference between

countries firms operate in. Uncertainty avoidance (UAI) is the degree to which people prefer

structured and predictable events over unstructured and uncertain events. Orij (2009) relates

uncertainty avoidance to lower entrepreneurial risk and weaker market orientation of companies.

Masculine cultures (MAS) are more assertive and success oriented, which reflects their market

orientation as opposed to feminine societies that focus on social responsibilities, relationships and

environment (Van der Laan Smith et al. 2005). Countries with high power distance (PDI) accept

unequal, hierarchical power distribution that may discourage information sharing (Zarzeski, 1996).

10We distinguish four legal systems because Ball et al. (2000) caution that dichotomous split into common/code law
countries may obscure within differences in governance models in code law countries.
16
Individuals in individualistic societies (IDV) are more independent and self-reliant compared to

collectivistic countries that emphasize consensus, inclusiveness, and lifetime employment. The job

market in individualistic societies promotes individual achievement, stimulates competitiveness

between individuals, and risk taking behavior (Schuler and Rogovsky, 1998; Kirkman and Shapiro,

1997; Shupp and Williams 2008).11 We expect analysts to produce less accurate TPs for firms that

operate in masculine, individualistic countries with high power distance and low uncertainty

avoidance. This is because these national traits should associate with high competitiveness of

managers, acceptance of uncertainty inherent in firm operations, secrecy, and more difficult access

to firm management for analysts. Such a forecasting environment should increase analyst forecasting

task leading to lower TP forecast accuracy.

Other explanatory variables: EPS and TP forecast characteristics

An EPS forecast is the main input into the valuation model used to produce a target price,

independently of whether analysts uses simple heuristics, such as price-to-earnings ratios, to justify

their target prices (Bradshaw 2002) or more sophisticated models, such as the residual income model

(Gleason et al. 2008). Further, Gleason et al. (2008) find that analyst EPS forecast accuracy positively

correlates with the TP forecast investment value, which highlights the potential link between EPS

and TP accuracy. If analysts do not exhibit differential ability to issue accurate target prices, TPs will

only reflect the accuracy of earnings forecasts. We measure EPS forecast error (aEPS) as the

absolute difference between the forecasted and actual earnings, scaled by the stock price at the end

11 The evidence on the relation between financial disclosure and Hofstede’s cultural dimensions is mixed. Zarzeski
(1996) and Hope (2003) find a negative relation between disclosure and power distance, and Salter and Niswander (1995)
report a negative relation between financial disclosure and uncertainty avoidance. However, Archambault and
Archambault (2003) find a positive relation between disclosure and PDI and UDI. Hope (2003) and Archambault and
Archambault (2003) report a negative relation between financial disclosure and masculinity, but Salter and Niswander
(1995) find no relation between disclosure and MAS. Jaggi and Low (2000) report that controlling for legal origin of the
accounting system, cultural environment has no effect on financial disclosure.
17
of the previous fiscal year. We use the ratio of the target price to the concurrent stock price at the

TP issue date less one, to measure the projected stock price change (TP/P). TPs that are further

away from the concurrent price are more difficult to be met by the actual stock price and are more

likely to be ex-post inaccurate.

Other explanatory variables: firm characteristics

Firm characteristics include firm market capitalization (MV) and the number of analysts following a

firm (F_#Ana), which proxy for the quality of the firm’s information environment and competition

among analysts respectively. We expect analysts to produce more accurate forecasts for firms with a

rich information environment and when competition among analysts is high. We use price

momentum, MOM, to capture predictable price patterns. Continuation (reversal) in price

momentum may increase (decrease) TP accuracy. We use stock price volatility scaled by the mean

price level to measure firm total risk (COV).12 Option theory suggests that higher stock price

volatility should increase the likelihood the stock price will meet the target price over the TP forecast

horizon (Bradshaw and Brown 2007). At the same time, the absolute TP error should be larger for

more volatile, i.e. less predictable, stocks.

Other control variables and regression specification

We use the performance of the leading market index for the (primary) exchange where the firm’s

stock lists, over the 12 months after the TP issue date to capture the target price accuracy

component that is due to the (random) ex-post performance of the equity market (Mkt ret).

Unexpectedly poor (good) market performance means that TPs predicting a stock price decline

(appreciation) will have a higher chance of being ex-post accurate, even if individual analysts have no

12Using the stock price coefficient of variation (COV) to capture price variation adjusts for differences in price levels
and currency across firms.
18
differential ability to forecast target prices accurately. A dummy variable (Fin cris) flags the recent

financial crisis period. We mark the beginning of the financial crisis period in September 2007.13 The

financial crisis continues until the end of our sample period. To control for time and industry

effects, we include a set of annual dummies (Year dummies) and ten industry dummies (Industry

dummies). Year dummies are for the TP forecast issue year. Industry dummies are based on the sector

code from IBES SIG code. Table 1 provides detailed variable definitions. All continuous dependent

and explanatory variables are winsorized at the 1% level.

[Insert Table 1 around here]

The empirical specification of our multivariate regression that examines the determinants of

TP forecast accuracy is:

Accuracy measure  0  1 ln A _ exp  2 ln A _# Firm  3 ln A _# Count  4 ln B _# Ana

 5 Disclosure  6 Enforcement  7Owner con  8 Legor GE  9 Legor FR
 10 Legor SC  11PDI  12 IDV  13UAI  14 MAS (5)
TP
 15 aEPS  16  17 ln MV  18 ln F _# Ana  19 MOM  20COV
P
10 14
 21 Mkt ret  22 Fin cris   23k Industry dummies   34 kYear dummies  
k 0 k 0

where the Accuracy measure is one of the TP accuracy measures defined above, and ln denotes a

logarithmic transformation of the variable.14 Also, in regressions where the TP forecast accuracy

measures are adjusted for the actual length of the holding period (Met_any_rev and aTPE_rev), the

return on the market index (Mkt ret) is calculated over the same period as the accuracy measures.

13 September 2007 is the month in which Swiss Bank UBS announced a third quarter pre-tax loss of $690 million and a
$3.42 billion write-down of mortgage backed securities. Announcements of losses on mortgage backed securities by
other large international banks followed shortly, leading to the subprime crisis.
14 For aTPE, aTPE_rev, aEPS, and A_exp we use log 1 + corresponding variable to account for zero values. Log

transformations ensure more normal distribution of the TP and EPS accuracy measures that have zero lower bound,
which could bias OLS estimates. Logs of analyst and broker characteristics reflect that we should expect diminishing
effect that analyst experience, firm and country following, and broker size have on TP accuracy. For example, the
increase in TP forecast accuracy due to an increase in broker size by one analyst should be higher for small compared to
large brokerage houses. Diminishing effect on accuracy also explains why we use logs of firm size and for the number of
analysts following a firm.
19
 IV. DATA AND SAMPLE

Target price forecasts for firms domiciled in 16 countries are collected from the IBES International

Detail files from January 1, 2002 to July 1, 2009.15 We select only target prices with a 12-month

forecast horizon, and for firms where the actual stock price is non-missing for 12 months before

and 12 months after the forecast issue date. We retain target prices accompanied by one-year-ahead

EPS forecasts, where the accompanying EPS forecast is issued within the past 90 days, and the TP

issue date is prior to the EPS review date (the date on which the analyst last confirmed that her EPS

forecast is still outstanding).16 Further, as in Clement (1999), we retain EPS and TP forecasts issued

between 30 days and 330 days prior to the fiscal-year-end date. We use the US and international

versions of the broker translation file to match broker names between the target price and EPS

files.17 Analyst and broker characteristics are constructed using the IBES detail EPS file starting from

January 1995, which avoids eliminating observations in the early sample to construct our explanatory

variables and produces more reliable measures (Clement 1999). For non-US firms, stock prices, and

the number of common shares outstanding for calculating firm market capitalization are from

Datastream. For US firms, stock price data and the number of shares outstanding are from CRSP.

Firm actual and forecasted earnings, and target prices are expressed in the company’s default

currency assigned by IBES to every company under coverage.18 We exclude stocks where the default

currency is different from the currency of actual stock prices. To ensure comparability across firms,

15 IBES international files are scarcely populated with target prices before 2002. The other commonly used source of
target price data, First Call, was acquired by Thomson Reuters in June 2001 and was subsequently merged with IBES
(verified by email correspondence with Thomson Reuters). First Call target price data was discontinued in 2004.
16 Our correspondence with the IBES representative confirms that a TP forecast issued without an accompanying EPS

forecast on IBES implies that the analyst considers her latest EPS forecast to be still outstanding, provided that the TP
forecast is issued prior to the EPS review date. We use EPS at most 90 days prior to the TP forecast issue to eliminate
stale EPS estimates.
17 The broker translation file is from 2005, which eliminates broker houses covered by IBES after that date. We lose less

than 4% of target price forecasts due to this limitation.

18 According to IBES detail history user guide, all detailed estimates on IBES are provided in the default currency IBES

allocates to each firm. This is usually the company’s reporting currency. All estimates received in a currency other than
the default currency are converted to the default company currency using the exchange rate of the estimate’s activation
date.
20
we convert firm market capitalization to USD. Our final sample includes 585,718 target price

forecasts for 9,982 firms issued by 12,792 analysts employed by 621 brokers.

[Insert Table 2 around here]

Table 2 describes the sample breakdown by country. The bottom raw “Total” shows the

number of unique observations. Firms from the largest capital markets—the US, the UK and

Japan—dominate the sample (69.9% of sample TPs), with US firms alone making up 55.2% of the

sample target prices and 44.8% of the sample firms. Firms from the US and the UK enjoy large

broker (324 and 190) and analyst coverage (5,040 and 2,240), consistent with New York and London

playing a dominant role in international financial markets. The proportion of Hong Kong domiciled

firms in the sample is similar to that of the more mature European markets, such as France and

Germany, which reflects the importance of Hong Kong as a financial hub in Asia.

Descriptive statistics for TP accuracy measures

Panel A of Table 3 presents the descriptive statistics for the analyst TP and EPS forecast accuracy

measures. Across the pooled sample, 59.1% of TP forecasts are met at some point during the 12-

month forecast period. The lowest proportion of met TPs can be found in Italy (54.0%), while the

highest proportion of met TPs is in Australia (66.1%) and Hong Kong (64.3%).19 The proportion of

met TPs in the US is 54.7%, which is consistent with prior US evidence. The proportion of target

price forecasts met at some point during the 12-month forecast period is 45% in Bradshaw and

Brown (2007), who examine TP accuracy in the US over the period 1997–2002, and 54.3% in

Asquith et al. (2005) for Institutional Investor All-American analysts in the US over the period

19A contributing factor to the relatively high Met_any TP accuracy for Australian firms could be the commodity boom,
which resulted in the Sydney All Ordinaries Index outperforming the S&P500 index by 4.2% p.a. over the period
January 2002–January 2009. High TP accuracy for firms in Hong Kong is likely driven by the double-digit growth in
China, with Hang Seng outperforming the S&P500 by 6.5% p.a. over the same period as above. This reflects the
importance of controlling for the market return performance after the TP forecast issue when examining TP forecast
accuracy.
21
1997–1999. Our sample mean absolute TP forecast error is 44.7%, and ranges from 58.2% in

Denmark to 37.3% in Japan. Mean aTPE in the US is among the highest in the sample at 49.5%,

which mirrors the low frequency of met TPs in this market.

[Insert Table 3 around here]

Using the TP-revision-adjusted Met_any, i.e. Met_any_rev, the average proportion of met TPs

reduces to 43.4%. This reflects that, conditional on the magnitude of projected price change (TP/P),

the TP forecast is less likely to be met by the actual stock price over shorter horizons. The lowest

proportion of met TPs is found in the US (38.5%), and the highest proportion is found in Hong

Kong (47.1%). Using the TP-revision-adjusted absolute TP error measure, aTPE_rev, the mean

absolute forecast error reduces to 35.5%, compared to 44.7% for the aTPE measure, and is the

highest in Denmark (47.3%) and the US (44.8%), and the lowest in Finland (30.0%).20 In unreported

results, we find that the sample mean EPS error is 2.6% of the stock price at the end of the previous

fiscal year. The lowest mean EPS forecast error is in the US, 1.6%, and is statistically lower

compared to the mean EPS error for the remaining 15 countries based on a t-test and Wilcoxon test.

This suggests that even though EPS forecasts are on average more accurate in the US, they do not

necessarily translate into more accurate TPs.

Panel B presents the average TP accuracy measures for each year in the sample. Met_any

improves, in general, over the period 2002–2006, from 51.7% to 63.2%, but deteriorates during the

financial crisis period 2007–2009. The dramatic recovery in Met_any during 2009 likely reflects the

effect of the spring 2009 market rally. Average absolute TP error reduces from 51.9% in 2002 to

20 In unreported results, we find that the average singed TP error is 4.5%. The signed TP error is the highest in Italy
(13.6%) and the lowest in Hong Kong (−11%). We do not use the signed TP forecast error as: (1) the signed TP error
does not properly distinguish between more and less accurate analysts over our sample period because it averages out
the low or negative TP error over the boom years (2003–2007) and the positive TP error due to the financial crisis, and
(2) previous EPS accuracy studies use absolute EPS error to measure forecast precision.
22
35.1% in 2006, and levels out at 54.2% over 2007–2009. The patterns for Met_any_rev and aTPE_rev

mirror that of Met_any and aTPE respectively.

Panel C evaluates the correlation coefficients among the various TP forecast accuracy

measures. There is a strong positive correlation between Met_any and Met_any_rev (0.726) and

between aTPE and aTPE_rev (0.744), which suggests that TP revisions have little effect on the

construct validity of our main TP accuracy measures. Consequently, the specification of the TP

accuracy measures should have relatively little influence on the validity of our inferences. Further,

the indicator and continuous TP forecast accuracy measures are significantly correlated, which

indicates that they capture complementary dimensions of TP accuracy.

Descriptive statistics for explanatory variables

Table 4 reports the summary statistics for the explanatory variables. Averages are calculated at TP

forecast level, i.e. using characteristics measured at each TP forecast issue. The average analyst firm-

specific forecasting experience is slightly over 2.8 years, and analysts following US and Japanese

firms have the longest mean experience following a firm (3.219 and 3.532 years). Also, analysts

following US and Japanese firms produce research reports for the largest number of firms (around

14 firms) compared to the pooled sample mean of slightly over 9 firms. On average, Dutch firm

analysts follow companies from over 2.3 countries, which likely reflects the relatively small domestic

equity market in the Netherlands. Analysts for US, Australian, and Japanese firms show the highest

country-specialization as they are the least likely to forecast across multiple countries. The average

broker size is 98 analysts. The UK has the highest accounting disclosure index (0.831) and Austria

the lowest (0.607). The mean ownership concentration index is 0.375, and the US has the most

dispersed ownership structure. Italy and Spain have the lowest values of the enforcement index

(−3.55 and −3.65 respectively), and the US and the UK the highest (1.21 and 1.16 respectively). A

23
quarter of countries in the sample have the common law origin of the accounting system, and Hong

Kong and France have the highest power-distance indexes (68). The country scoring the highest on

individualism is the US (91), and on uncertainty avoidance is Belgium (94). Japan has the highest

masculinity index.

[Insert Table 4 around here]

Panel B of Table 4 shows that on average, analysts project a 15.9% increase in the stock

price over the next 12 months, with TP/P ranging from 22.4% for Swiss firms to 9.1% for firms

domiciled in Belgium. The mean TP/P ratio for US firms is 19.7%, which is considerably lower

compared to earlier US evidence (30.9% during 1997–2002 in Bradshaw and Brown, 2007, and

32.9% during 1997–1999 in Asquith et al., 2005). The lower projected price increase found in our

sample for US firms may reflect the effect of the NASD 2711 regulation and the SEC rule 472

introduced in 2002. The rules were intended to reduce conflicts of interests in analyst research and

promote less biased sell-side equity research. These rules prohibit members of the NASD and

NYSE from tying analyst compensation to the broker’s investment banking transactions and from

offering favorable research to a firm as an incentive to elicit future investment banking business.

Even though the regulation was specific to the US market, it is likely that global brokerage houses

implemented these rules across their US and overseas divisions.

The mean firm capitalization is $10,037.1m, and sample firms are followed on average by

approximately 16 analysts.21 Target prices are released following an average 0.6% decline in the stock

price over the prior 90 days, while the prior one-year mean stock (standardized) price volatility

preceding the TP issue is 7.7%. The mean market return is 5.2% for the 12-month period following

the TP forecast issue and reduces to 2.7% when truncating the returns on the TP revision date

21Firms domiciled in Europe have on average larger capitalization compared to US stocks, which reflects that a larger
proportion of smaller firms list on the exchange in the US than in other markets (Fama and French, 1998, 2008).
24
(results untabulated). Finally, 45% of TP forecasts have been issued during the financial crisis.

Overall, Table 4 shows that our sample reflects a variety of institutional settings and that there is a

strong variation in analyst, broker and firm characteristics. Consequently, our sample provides an

ideal research setting to test for determinants of within- and across-country variations in TP forecast

accuracy.

V. EMPIRICAL RESULTS

We examine analysts’ ability to issue accurate target price forecasts in two steps. First, we compare

the accuracy of analyst TPs to the accuracy of simple price forecasts that investors could form based

on the information available at the TP issue date. If the accuracy of simple price forecasts is higher

than that of analyst TPs, the latter offer no value to investors. Second, to examine if analysts have

differential ability to produce accurate target prices, we estimate the TP forecast accuracy model

specified in equation (5).

Do analyst TP forecasts beat simple price forecasts based on past stock performance?

This section examines if analyst TPs beat the accuracy of simple price forecasts based on the

information available at the TP issue date. A simple Bayesian forecast extrapolates past stock

performance into the future and is our naïve price forecast, which we pitch against analysts’ TP

forecasts.

Table 5 compares the accuracy of analysts’ TPs to the accuracy of naïve price forecasts

across the 16 countries in our sample. The naïve price forecasts predict that the stock price in 12

months will be equal to the stock price at the forecast release date times one plus the previous 12-

month buy-and-hold return, naïve price forecasts. For each naïve price forecast, we calculate the four TP

accuracy measures from Section 3, naive Met_any, naive aTPE, naive Met_any_rev and naive aTPE_rev.

[Insert Table 5 around here]

25
 The second column of Panel A presents the proportion of analyst TPs that meet or exceed

the accuracy of naïve price forecasts. We find that, on average, analyst TPs meet or exceed the accuracy

of simple price forecasts in 74.5% of cases. The highest proportion of analysts TPs that meet or

exceed naïve price forecasts is for firms in Hong Kong and the lowest is for Italian firms. The fourth

column shows that analysts’ absolute TP forecast error is 9.8% lower compared to the absolute

forecast error of a naïve forecast.22 The difference between TP error and the error of the naive price

forecasts, aTPE − naive aTPE, ranges between −19.9% for firms domiciled in Hong Kong and zero

for Danish firms. The differences in forecast accuracy between the TP-revision-adjusted TP

measures and the naïve price forecasts show a similar pattern to that of our main TP accuracy

measures.

We perform five further sensitivity tests (results untabulated). First, we remove the top 5%

of stocks with the highest price momentum before the forecast issue. This examines if naïve price

forecasts pick up the momentum effect, which could bias the results in Table 5 in favor of analyst

superiority. The mean difference between the TP error and the error of the simple price forecasts

reduces to −7.67%, but still remains highly significant. The conclusions are unchanged when we use

a 10% cut-off point. Second, we remove the top 5% of naive aTPE to test if the results are affected

by extreme naive price forecasts due to potential data errors. The results for this subsample remain

qualitatively similar to that in Table 5. Third, we use returns excluding dividends to form naïve price

forecasts, which should more closely correspond to the analyst forecasted (ex-dividend) target prices.

Analyst TPs meet or exceed the accuracy of (ex-dividend) naïve price forecasts in 73.9% of cases and

the mean analyst TP error is 9.4% lower than the error of (ex-dividend) naïve price forecasts. Fourth, we

form the naïve price forecast based on the (country-specific) industry mean P/E ratio, calculated at

The results are unchanged when we compare the median difference between aTPE and the naïve price forecast error,
22

which is −7.02% for the pooled sample and negative in all countries we investigate.
26
the forecast issue, times the analyst one-year ahead EPS estimate. This is because Bradshaw (2002)

reports that analysts frequently compute target prices using simple heuristics, such as P/E ratios. If

analysts simply convert their current EPS estimates into target prices using simple heuristics, TPs

should not offer any incremental value to investors beyond EPS forecasts. The mean (median)

difference between TP error and the error of the price forecasts from the P/E ratios is −77.2%

(−44.0%), which shows that (1) analyst TPs are not simple transformations of analyst EPS forecasts

and that (2) analyst TPs are more accurate than heuristic-based price forecasts using P/E ratios.23

As a fifth sensitivity test, we examine if analyst TPs beat index price forecasts which predict that

the stock price in 12 months will be equal to the stock price at the forecast release date times one

plus the return on the market index over the preceding 12 month period. Index price forecasts

impose less data requirements and are less affected by individual stock price momentum or data

errors. We find that, on average, analyst TPs meet or exceed the accuracy of the index price forecast in

74.1% of cases based on Met_any, and the mean (median) analyst TP error is lower than that of index

price forecast in eleven (thirteen) countries. In the analysis, we do not consider martingale price

forecasts that predict that a stock price in 12 months’ time is equal to the stock price today. This is

because in efficient markets, investors require a premium for holding stocks (risk free rate plus beta

times the market premium). Only stocks with negative market beta that would offset the risk free

rate would justify using a martingale benchmark. Consequently, martingale price forecasts are

unlikely to be used by investors.

Based on the results in Table 5 and the further sensitivity tests, we conclude that, on average,

analyst TP accuracy exceeds that of naïve price forecasts. This means that investors are better off

following analyst target prices compared to naïve price forecasts.

23The error of the price forecasts from the P/E ratios is winsorized at 5% to eliminate extreme naïve price forecasts due
to potential data errors. Also, in calculating P/E ratios we exclude stocks with zero earnings, which reduces the sample
to 552,165 observations.
27
The determinants of TP forecast accuracy

Next, we examine if analysts have differential ability to produce accurate target prices based on

regression model in equation (5). The first columns of Table 6 report the regression results for the

main TP accuracy measures (Met_any and aTPE) and the latter columns describe results for the two

TP-revision-adjusted TP accuracy measures (Met_any_rev and aTPE_rev). The Exp.sign column

specifies the predicted coefficient signs, while the St.Eff column provides the standardized

coefficient estimates, i.e. the effect that a one standard deviation change in the explanatory variable

has on the TP accuracy measure. The regressions use firm- and analyst- dual clustered standard

errors as in Petersen (2009) to control for the cross-sectional dependence of observations. In

reviewing the results, we first discuss the evidence on analysts’ differential ability to forecast accurate

target prices. This is followed by the review of the results on the relation between institutional and

regulatory characteristics and TP accuracy.

Do analysts have differential ability to forecast accurate target prices?

For our main TP accuracy measures, Table 6 indicates that TPs issued by analysts with higher firm-

specific experience have lower error. This confirms that analysts learn to produce more accurate TPs

over time, as their forecasting experience for the firms they follow increases. However, analyst

experience does not correlate with the likelihood that the actual stock price will meet or surpass the

target price. Analysts following more firms issue more accurate TPs based on the two main TP

accuracy measures, which suggests that information spill-over effects from following multiple firms

improves TP accuracy. This complements the international evidence in Clement et al. (2003) and

Bolliger (2004), who find that analysts who follow more firms produce more accurate EPS forecasts.

Country-specialized analysts are more likely to issue more precise TPs, and TPs by analysts

28
employed by large brokers are more likely to be met by the actual price.24

[Insert Table 6 around here]

The regression results for the TP-revision-adjusted TP accuracy measures are qualitatively

similar to the results for the main TP accuracy measures. However, controlling for TP revisions,

analyst country-specialization predicts lower likelihood of a TP being met. Further, for the TP-

revision-adjusted absolute TP error, aTPE_rev, we also find that analysts from large brokerage

houses issue TPs with smaller absolute forecast error. This confirms that access to a larger pool of

resources at the broker improves TP accuracy. Together, the results of the TP-revision-adjusted TP

accuracy measures reinforce the results of the main TP accuracy measures that more skilled analysts

issue more accurate TPs.

Inspecting the economic significance of analyst and broker characteristics, we find that

access to a large resource pool at the broker has the largest standardized effect on Met_any, i.e. a one

standard deviation increase in ln B_#Ana leads to 6.24% higher likelihood that the stock price will

meet the target price; analyst firm following has the largest standardized effect on TP forecast error

(ln A_#Firm=−2.01%). Based on the results in Table 6 we conclude that, on average, analysts with

higher forecasting experience, following more firms, country-specialized, and employed by a large

broker issue more accurate TPs.

Do institutional and regulatory characteristics affect target price accuracy?

Table 6 documents that higher reporting disclosure increases the likelihood that the stock price will

meet or surpass the target price, and it reduces TP forecast error. The positive relation between

24 In unreported results we follow Sonney (2009) and calculate analyst country-specialization as the Herfindahl
concentration ratio, which is the sum across countries of the squared ratio of the number of firms followed by the
analyst in a country over the total number of firms followed by the analyst during the previous 12-months. The
correlation between the Herfindahl index and A_#Count is 0.92. Repeating the TP accuracy regression in equation (5)
using the Herfindahl index, we continue to find that TPs issued by country-specialized analysts have lower error but the
concentration ratio does not correlate with the likelihood that the actual stock price will meet or surpass the target price.
29
disclosure and TP accuracy persists for the two TP-revision-adjusted accuracy measures. This

confirms that disclosure has a positive effect on TP accuracy (Hope 2003a, 2003b). TPs for

companies operating in countries with UK origin of the legal system, i.e. countries with the

shareholder governance model, are more likely to be met over the next twelve months, which

supports results in Clement et al. (2003). Though weaker, this result is also present for the revision-

adjusted Met_any.

Cross-country differences in culture explain variation in average TP forecast accuracy.

Managers in cultures high in uncertainty avoidance may exhibit less risk taking behavior, and prefer

stability in their operating activities (Bontempo et al. 1997). This simplifies the analyst valuation and

forecasting task when producing TPs, which explains the positive relation between UDI and our TP

forecast accuracy measures. Further, Met_any shows a negative correlation with power distance,

individualism, and masculinity. These cultural dimensions associate with market-orientation of firms,

high competitiveness of individuals, high secrecy of managers and more difficult access to firm

management for analysts—characteristics that should associate with higher forecasting difficulty.

Controlling for disclosure, origin of the country’s legal system, and national culture, enforcement of

accounting standards and ownership concentration have no effect on TP forecast accuracy.

Regarding the control variables, we note that better earnings forecasters issue more accurate

target prices, but analysts who attempt to hype the stock price by forecasting a strong price increase

issue less accurate TPs.25 Looking at firm characteristics, we observe that TP forecasts for larger

firms are less likely to be met by the actual stock price, but exhibit lower error. Higher analyst

coverage increases the likelihood that a target price will be met by the actual stock price, which

suggests that competition among analysts may incentivize them to exert more effort into producing

25This reflects that analysts may issue optimistically biased target prices to curry favors with firm management in the
hope of obtaining a better access to firm management (Lim 2001; Ke and Yu 2006 ) or a future investment banking
contract (Lin and McNichols 1998; Kolasinski and Kothari 2008).
30
more accurate TPs. However, high analyst competition also increases the average TP forecast error.

There is a positive relation between price momentum and TP accuracy. In addition, TPs for firms

with higher stock price volatility are more likely to be met. However, high price volatility also leads

to higher TP error. The return on the local market index has a strong positive relation with TP

forecast accuracy, i.e. better ex-post market performance increases TP forecast precision. Finally, we

find that the unexpected fall in stock prices during the recent financial crisis has on average

decreased TP accuracy. The effect of the control variables in the accuracy regressions where

Met_any_rev and aTPE_rev are used is qualitatively similar.

To sum up, the results from Table 6 suggest that characteristics commonly associated with

analyst ability, such as experience, the number of firms an analyst follows, country specialization,

and broker size influence TP forecast accuracy. This confirms that more able analysts produce more

accurate forecasts of future stock prices. Further, we find support for our prediction that the

country’s institutional and regulatory setting affects average TP forecast accuracy.26

VI. ROBUSTNESS ANALYSIS

Instrumental variable regression

It is possible that analysts may be more optimistic about the prospects of certain firms and, as a

result, forecast overly high target prices, compared to what their valuation models would dictate.27

To test for the possibility that TP/P is endogenously determined in the TP accuracy regressions, we

run a Wald test of exogeneity. We reject the exogeneity of TP/P for all TP accuracy regressions. To

26 Thomson Reuters IBES support team confirm that IBES target price forecasts reflect the analyst projected price level
at the end of a specific (usually a 12-month) time horizon. However, IBES cannot confirm the exact definition of the
price target used by each contributing broker. This may affect construct validity of our TP accuracy measures. However,
any measurement error associated with target prices would work against finding a relation between analyst and
institutional characteristics and TP forecast accuracy measures. We thank an anonymous referee for pointing this out.
27 We discuss potential reasons for why analysts would deviation from the price forecasts suggests by their valuation

models in footnote 24.

31
assess whether our results are robust controlling for the endogeneity in TP/P, we re-estimate the

regressions using an instrumental variable (IV) method. This is particularly important as TP/P has

the largest economic effect on Met_any (TP/P=−45.9%) and on aTPE (TP/P=−44.49%). We use

the mean TP/P of all forecasts issued by a given analyst in the preceding 12 month period as our

instrument for the current period TP/P. The past mean TP/P should average out the analyst’s

(positively and negatively) biased TPs, while it is also unaffected by the current period market

and/or analyst sentiment. Larcker and Rusticus (2010) advocate the use of a partial R-square test to

assess the validity of the instrument, which produces a significant F-test of 867.104 (p-value=0.000),

and a partial R2 from the first stage regressions of 11.81%. This confirms that the instrument is

properly specified.

[Insert Table 7 around here]

Columns 2SLS of Table 7 report the TP accuracy regression results using the IV estimation

approach. The results for analyst and broker characteristics from the IV regression are qualitatively

similar to the basic models in Table 6, and in particular, the coefficients on TP/P remain significant

and have the correct sign.28 Also, the significance and sign of the coefficients on the institutional and

regulatory characteristics that explain TP accuracy remain similar. Collectively, the results from the

IV estimation approach support our main conclusions.

Heterogeneity in analyst forecasting environment across countries

Our analysis so far assumes that accounting disclosure quality, the enforcement of accounting

standards, ownership concentration, origin of the legal systems and culture should explain country-

variations in analyst average TP forecast accuracy. To test if the relation between analyst and broker

characteristics and TP accuracy is sensitive to the specification of controls used for the information

28 For the 2SLS results, we only use analyst-clustered standard errors, which may explain the generally higher coefficient
significance levels.
32
environment in which firms and analysts operate, we substitute our institutional and regulatory

characteristics for country dummies. Country effects capture the heterogeneity in the analysts’

forecasting environment specific to each country, without identifying the individual factors that

explain the average cross-country differences in TP accuracy.

The Country effects columns of Table 7 report the results for the Met_any and aTPE

regressions after including country dummies. The results for analyst and broker characteristics

remain unchanged for both TP accuracy measurers, with the exception of the coefficient on country

specialization, which becomes insignificant in the aTPE regression. This means that our main

inferences on the relation between analyst and broker characteristics and TP accuracy are mostly

unaffected by the specification of the institutional and regulatory characteristics.

The proportional mean absolute TP forecast error

To examine the determinants of EPS forecast accuracy, Clement (1999) uses the proportional mean

absolute EPS forecast error, which compares the individual analyst’s EPS forecast error to the mean

forecast error of other analysts following the same firm in a given year. He argues that this increases

the model’s ability to identify systematic differences in EPS forecasts accuracy relative to a model

that controls for firm fixed effects and year fixed effects. Later EPS accuracy studies largely adopted

this research design. To test if our results are sensitive to using this measure of TP accuracy, we

construct the mean-adjusted TP error (aTPE_ma), which is the individual TP forecast error scaled by

the mean TP forecast error of all TP forecasts issued for a firm in a calendar year less one. Higher

(lower) values of aTPE_ma represent worse (better) than average performance. As in Clement

(1999), to properly control for firm-year effects we adjust analyst characteristics, EPS forecast error

and TP/P ratio by subtracting their related firm-year means.

33
 The last columns of Table 7 report the estimates from a TP accuracy regression where

aTPE_ma is used as the dependent variable. We retain only firm-years with at least five analyst TP

forecasts, which reduces the sample to 539,118 observations. Analyst experience and broker size

predict lower relative TP forecast error, similar to Table 6 results. Overall, we conclude that the

Table 6 results are generally robust to using Clement’s (1999) specification of the forecast accuracy

measure.

Recency of EPS estimates

The EPS forecast error in regression model (5) is measured for the most recent EPS forecast issued

by the analyst for the firm within the past 90 days. For 38% of TP estimates, the EPS forecast issue

date is earlier than the TP estimate issue date. This means that the relation between analyst

characteristics and TP forecast accuracy may reflect the accuracy of the latent EPS forecast that the

analyst would have issued concurrently with the TP estimate. In unreported results we replicate the

regression analysis presented in Table 6 for a subsample of 362,143 TPs where the accompanying

EPS forecast was issued on the same date. The results are qualitatively similar to that in Table 6,

which shows that our results are insensitive to the recency of EPS estimates.

VII. PERSISTENCE IN ANALYST TARGET PRICE ACCURACY

A track record of past TP forecasting accuracy could provide an incremental signal to investors as to

which contemporaneous TP forecasts are more likely to be ex post accurate. However, in a working

paper examining whether US analysts have persistent ability in forecasting accurate TPs during

1997–2002, Bradshaw and Brown (2007) find no evidence that past TP accuracy leads to superior

current TP accuracy. This section revisits this question.

34
 Panel A of Table 8 presents the prior and current period TP accuracy measures for quintile

sorts based on the average analyst aTPE in the past year. The sorts are independent for each of the

16 countries. We observe a positive relation between past TP accuracy and current period TP

accuracy, both for Met_any and aTPE. Specifically, moving from the lowest to the highest past TP

accuracy portfolio, Met_any improves by close to 12% (from 53.4% to 59.8%) and aTPE reduces by

close to 48.6% (from 65.3% to 33.6%).

[Insert Table 8 around here]

The first columns of Panel B of Table 8 replicate the main TP accuracy regressions of Table

6 with the addition of the analyst’s mean prior year aTPE variable (aTPEt-1), which is used to

measure the analyst’s past TP accuracy. We find that higher past TP error leads to a lower likelihood

of the current TP being met, and results in a higher current TP error. Analyst and broker

characteristics have a similar predictive power as in Table 6, with the exception of the size of analyst

brokerage house, which has a positive effect on the TP forecast error. Also, the signs and

significance of institutional and regulatory characteristics are similar to that in Table 6, but for

disclosure, which does not influence the TP forecast error.

Why do our results differ from Bradshaw and Brown (2007)? The sample of target prices in

Bradshaw and Brown (2007) is heavily weighted in TPs issued after 2000 (i.e. 64.5% of TPs in their

sample). The price depression following the burst of the internet bubble had a strong negative effect

on accuracy of TP forecasts issued after 2000 that is evident in their Table 3, which shows an

increase in TP forecast error from 21% in the second half of 1999 to 41.2% in the first half of 2000.

A similar price shock occurred over our sample period following the subprime mortgage crash,

which allows us to test if findings in Bradshaw and Brown (2007) are due to the unexpected price

fall starting in March 2000. The last columns of Panel B of Table 8 repeat the TP accuracy

regressions when we include the analyst’s mean prior year aTPE, and an interaction term between
35
aTPEt-1 and the financial crisis dummy. The coefficient on aTPEt-1*Fin cris is significant for both

Met_any and aTPE regressions but with the opposite sign to that on aTPEt-1. This confirms that the

price shock in the aftermath of the dot-com bubble may explain the findings in Bradshaw and

Brown (2007).29

In unreported results, instead of aTPEt-1 we use the residuals from within country and

industry regressions of the past TP forecast error on the past EPS forecast error. This is because the

relation between the concurrent and past TP forecast accuracy may reflect analysts’ persistent ability

to forecast accurate earnings. Including the residuals from the past TP forecast accuracy regressions

leaves our inferences intact. Further, the results in Table 8 persist when we use the prior year mean

Met_any measure, and the TP-revision-adjusted accuracy measures as proxies for prior period TP

accuracy. In addition, estimating the regressions from Table 8 only for US firms generates

qualitatively similar results. Overall, we conclude that higher TP accuracy in the past year predicts

higher contemporaneous TP forecast precision, consistent with analysts exhibiting persistent ability

to issue accurate target prices.

VIII. TP FORECAST ACCURACY AFTER THE MANDATORY IFRS ADOPTION

Fourteen countries in our sample implemented IFRS starting from January 2005. The

implementation of IFRS was anticipated to increase cross-country comparability and transparency of

accounting disclosure, and result in higher quality information about firm performance becoming

available to analysts and investors. Subsequently, better quality inputs into analyst valuation models

29 The differences in our results compared to Bradshaw and Brown (2007) may also be due to us using (1) a more
comprehensive set of control variables, and (2) a more recent sample period. For the former, we find that for TPs issued
for US firms only, the coefficient on past TP accuracy is lower by 14.3% for the Met_any regression and by 6.4% for
aTPE regression when we use the accuracy model specification in Bradshaw and Brown (2007) compared to our model
specification. For the latter, we believe that the NASD 2711 regulation and the SEC rule 472 introduced in the wake of
the Enron and World.com accounting scandals and the burst of the internet bubble may have motivated analysts to exert
more effort to produce more accurate TP forecasts.
36
should lead to an improvement in analyst TP forecast accuracy. The question whether the adoption

of IFRS has improved analysts’ ability to issue more accurate TPs remains unanswered so far.30

In unreported results we repeat the TP accuracy regressions in equation (5) for the 14 IFRS

adopting countries, after including analyst past TP accuracy and an indicator variable that equals 1 if

the TP and the EPS forecasts are issued for a fiscal year after the IFRS mandatory adoption date,

and zero otherwise. We find that the mandatory IFRS adoption reduces the TP forecast error, but

has no effect on the likelihood that a target price is met by the actual price over the 12-month

forecast period. The results remain unchanged when we re-estimated the regressions after including

an interaction term between the EPS forecast error and the IFRS dummy. This is because

controlling for the effect of financial crisis, the mean aEPS reduces by 0.75% after IFRS adoption,

and the IFRS dummy, had it not been also interacted, may simply be capturing the lower EPS

forecast error after the mandatory IFRS adoption.

Overall, we conclude that the mandatory adoption of IFRS has improved analysts’ ability to

forecast accurate TPs, which complements previous evidence on the effect that IFRS has had on

EPS forecast accuracy. We attribute this finding to the higher comparability of financial statement

information across firms and countries after the IFRS adoption, which is likely to have aided the

analyst’s valuation task.

IX. CONCLUSIONS

This study adds important international evidence to the fledging literature on the properties of

analyst research outputs other than EPS forecasts. Using target prices from 16 countries—including

the US, 12 European countries, Japan, Australia and Hong Kong—we examine if analysts have

30 To date, there is limited evidence about how the mandatory IFRS adoption has affected analysts’ EPS forecast
accuracy. Byard et al. (2011) and Preiato et al. (2010) find a reduction in the EPS forecast error and forecast dispersion
following the adoption of IFRS for 20 and 13 European countries respectively. Horton and Serafeim (2010) extend this
evidence outside the EU market.
37
differential and persistent ability to forecast accurate target prices, controlling for the accuracy of

their concurrent EPS forecasts. First, we show that TP accuracy exceeds that of naïve price forecasts

formed by extrapolating past stock performance. Second, we find that analyst past TP accuracy,

forecasting experience, the number of firms an analyst follows, country specialization, and broker

size predict TP forecast accuracy. We also document that a country’s institutional and regulatory

setting has an effect on TP accuracy. Factors such the accounting disclosure quality, the corporate

governance system, cultural traits, and IFRS regulation explain cross-country differences in TP

forecast accuracy.

Our evidence that analysts have differential and persistent skill to issue accurate TP forecasts

stands in strong contrast to early claims made by the popular press about analysts’ opportunistic use

of target prices and low TP forecast accuracy—with headlines such as “‘Price Targets are Hazardous

to Investors’ Wealth’’ (New York Times 08/06/2001) or ‘‘Forget Analysts’ Price Targets. They’re

Really Just for Show’’ (Forbes 12/11/2000) dominating the press. This study responds to a call by

Ramnath et al. (2008, 68), who in a comprehensive review of the analyst forecasting literature

emphasize that “further research is required to describe the behavior of the forecasts that have

higher price impacts, such as long-term growth forecasts and target prices”.

38
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 Appendix I. An example illustrating calculations of TP forecast accuracy measures

The below example illustrates how we calculate the four TP forecast accuracy measures used in the
study. Further, we discuss the four TP accuracy measures when the direction of the new TP forecast
differs from the preceding TP.

A simple illustration of the four TP accuracy measures

Assume that on 12th June 2006, an analyst issues a target price of USD110 for the IBM stock. The
target price has a 12-month forecast horizon and the closing stock price on 12th June 2006 is
USD77. Over the next 12-months, IBM’s stock price reaches a high of USD113.5 and a low of
USD73. The closing price on 12th June 2007 is USD109. The values for the two main TP accuracy
measures are: Met_any=1 as the actual stock price met and surpassed the target price at some point
over the 12 months after the TP forecast issue date, and aTPE=|USD110−USD109|/
USD77=1.30%.

Further, assume that on 20th March 2007, the analyst issues a new target price for IBM of USD117.
The new target price has a 12-month forecast horizon and the closing price on 20th March 2007 is
USD104.5USD. The high and low price between 12th June 2006 and 20th March 2007 are 111USD
and 73USD respectively. The revision-adjusted target prices are: Met_any_rev=1 as the actual stock
price has met and surpassed the target price of 110USD at some point between 12th June 2006 and
20th March 2007, and aTPE_rev=|110−104.5|/77=7.14%.

The four TP accuracy measures when the direction of the new forecast differs from the
preceding TP.
Alternatively, assume that the new TP forecast issued on 20th March 2007 projects a USD60 for IBM
stock price in 12-months. The closing price on 20th March 2007 is again 104.37USD, but the actual
price on 12th June 2007 is USD57. The high and low price between 12th June 2006 and 20th March
2007 are 111.2USD and 73.57USD respectively. In this scenario, Met_any, Met_any_rev, and
aTPE_rev remain unchanged, however, aTPE increases from 1.3% to 68.83%. The latter result
wrongly indicates poor analyst forecasting ability as the analyst correctly predicted a stock price
decline when issuing the revised TP forecast.

44
 TABLE 1
Variables definition
Variable Definition
1. Dependent variables: TP forecast accuracy measures
An indicator variable equal to one if the actual stock price reaches the target price, TP, at any time
over the 12 month period after the TP forecast issue, and zero otherwise. The TP forecast and
Met_any
actual stock prices are expressed in the IBES default reporting currency for the firm effective at
the TP forecast issue date.
The absolute difference between the TP forecast and the stock price at the end of the 12-month
forecast period, P12, scaled by the stock price at the forecast issue date, Pst. The TP forecast and
aTPE
actual stock prices are expressed in the IBES default reporting currency for the firm effective at
the time.
An indicator variable equal to one if the actual stock price reaches the target price, TP, at any time
between the TP forecast issue date and the subsequent TP forecast revision date, and zero
Met_any_rev otherwise. If a TP forecast has not been revised over the 12-month forecast horizon, Met_any_rev=
Met_any. The TP forecast and actual stock prices are expressed in the IBES default reporting
currency for the firm effective at the TP forecast issue date.
The absolute difference between the TP forecast and the stock price on the TP forecast revision
date subsequent to the TP forecast issue, Prev, scaled by the stock price at the forecast issue date, Pst.
aTPE_rev If a TP forecast has not been revised over the 12-month forecast horizon, aTPE_rev= aTPE. The
TP forecast and actual stock prices are expressed in the IBES default reporting currency for the
firm effective at the TP forecast issue date.
2. Independent variables: Analyst and broker characteristics
A_exp The number of years an analyst has issued at least one EPS forecasts for a given firm.
The number of companies for which an analyst issued at least one EPS forecast over the previous
A_#Firm
12 months.
The number of countries where the firms followed by the analyst are domiciled in. A firm is
A_#Count followed by the analyst if the analyst has issued at least one EPS forecasts for a given firm over the
previous 12 months.
The number of analysts at the broker that issued at least one EPS forecast in the previous 12
B_#Ana
months.
3. Independent variables: Institutional and regulatory characteristics
The index of accounting disclosure quality based on aggregate annual financial statement
Disclosure disclosure scores from CIFAR (1993, 1995). The index ranges between 0 (lowest disclosure) to 1
(highest disclosure). Sourced from Hope (2003b).
The index of enforcement of accounting standards. The index is based on the factor analysis of (1)
Enforcement country-level audit spending, (2) judicial efficiency, (3) rule of law, (4) insider trading laws, and (5)
shareholder protection. Higher values reflect stronger enforcement. Sourced from Hope (2003b).
Ownership concentration index, which is the median proportion of common shares owned by the
Owner con three largest shareholders in the ten largest privately owned non-financial firms. Sourced from La
Porta et al. (1998).
An indicator variable that equals one if the country’s legal system originates from the English
Legor UK
common law system, and zero otherwise. Sourced from La Porta et al. (1998).
An indicator variable that equals one if the country’s legal system originates from the German civil
Legor GE
law system, and zero otherwise. Sourced from La Porta et al. (1998).
An indicator variable that equals one if the country’s legal system originates from the French civil
Legor FR
law system, and zero otherwise. Sourced from La Porta et al. (1998).
(continued on next page)
45
 TABLE 1 (continued)

An indicator variable that equals one if the country’s legal system originates from the Scandinavian
Legor SC
civil law system, and zero otherwise. Sourced from La Porta et al. (1998).
Power distance. The extent to which a society accepts unequal distribution of power. Sourced
PDI
from www.geert-hofstede.com/hofstede_dimensions.php.
Individualism. The degree to which individuals are encouraged to be independent and self-reliant.
IDV
Sourced from www.geert-hofstede.com/hofstede_dimensions.php.
Uncertainty avoidance. The degree to which people prefer structured and predictable events over
UAI unstructured and uncertain events. Sourced from www.geert-
hofstede.com/hofstede_dimensions.php.
Masculinity. The degree to which individuals in a society are driven by competition, achievement
MAS
and success. Sourced from www.geert-hofstede.com/hofstede_dimensions.php.
4. Independent variables: TP and EPS forecast characteristics
The absolute difference between the actual and forecasted EPS scaled by stock price at the end of
aEPS the previous fiscal year. The actual and forecasted EPS, and the stock price are expressed in the
IBES default reporting currency for the firm effective at the EPS forecast issue date.
The ratio of target price to actual price on the forecast issue date less one. Both the TP and the
TP/P actual stock price are expressed in the IBES default reporting currency for the firm effective at the
TP forecast issue date.
5. Independent variables: Firm characteristics
MV Firm market capitalization measured at the TP forecast issue date and expressed in USD million.
F_#Ana The number of analysts issuing at least one EPS forecasts for a firm over the previous 12 months.
MOM Buy-and-hold stock returns for 90-days prior to the forecast issue date.
Stock price standard deviation over 90-days prior to the forecast issue date scaled by the mean
COV
price level over this period.
6. Independent variables: Other controls
The return on the leading market index for the primary exchange where the firm’s stock lists
Mkt ret
over 12 months after the forecast issue date.
An indicator variable equal to 1 if the forecast is issued after 1st September 2007 and zero
Fin cris
otherwise.
Year dummies Year dummy variables.
Industry dummies Ten industry dummies based on the sector code from IBES SIG code.
Mkt dummies Country dummy variables.
The table presents the definitions of the main variables used in the study. We divide the variables into six categories:
(1) TP forecast accuracy measures, (2) analyst and broker characteristics, (3) institutional and regulatory
characteristics, (4) TP and EPS forecast characteristics, (5) firm characteristics, and (6) other controls.

46
 TABLE 2
Distribution of sample target prices, firms, brokerage houses and analysts by country

No TP No TP (%) No firms No firms (%) No brokers No brokers (%) No analysts No analysts (%)
Australia 24852 4.2% 657 6.6% 72 11.8% 680 5.3%
Austria 2546 0.4% 59 0.6% 68 11.0% 361 2.8%
Belgium 4407 0.8% 105 1.1% 58 9.3% 477 3.7%
Denmark 5036 0.9% 90 0.9% 63 10.1% 394 3.1%
Finland 8649 1.5% 114 1.1% 101 16.3% 512 4.0%
France 26103 4.5% 446 4.5% 155 25.0% 1883 14.7%
Germany 24239 4.1% 400 4.0% 131 21.1% 1573 12.3%
Hong Kong 22729 3.9% 409 4.1% 79 12.7% 1199 9.4%
Italy 10711 1.8% 220 2.2% 69 11.1% 791 6.2%
Japan 41316 7.1% 1221 12.2% 47 7.6% 905 7.1%
Netherlands 11994 2.0% 163 1.6% 148 23.8% 1003 7.8%
Spain 9252 1.6% 132 1.3% 65 10.5% 708 5.5%
Sweden 12953 2.2% 202 2.0% 104 16.7% 754 5.9%
Switzerland 12593 2.2% 198 2.0% 132 21.3% 914 7.1%
United Kingdom 44996 7.7% 1117 11.2% 190 30.6% 2240 17.5%
United States 323342 55.2% 4472 44.8% 324 52.2% 5040 39.4%
Total 585718 9982 621 12792
The table presents the distribution of target prices, sample firms, brokerage houses and analysts across 16 countries. No TP stands for the number of target prices.
No firms is the number of unique firms, No brokers the number of unique brokerage houses, and No analysts the number of unique analysts. (%) denotes percentages.

47
 TABLE 3
Summary statistics of target price accuracy measures
Panel A: Mean values of TP forecast accuracy measures
Main TP forecast Alternative TP forecast
accuracy measures accuracy measures
N Met_any (%) aTPE (%) Met_any_rev (%) aTPE_rev (%)
Australia 24852 66.1% 47.4% 45.4% 35.6%
Austria 2546 59.8% 50.6% 46.3% 37.6%
Belgium 4407 59.1% 40.6% 43.9% 31.2%
Denmark 5036 56.1% 58.2% 40.7% 47.3%
Finland 8649 62.2% 44.1% 46.4% 30.0%
France 26103 58.3% 38.7% 42.6% 30.5%
Germany 24239 60.8% 44.3% 44.4% 35.0%
Hong Kong 22729 64.3% 48.4% 47.1% 36.0%
Italy 10711 54.0% 38.3% 41.2% 31.6%
Japan 41316 59.1% 37.3% 47.0% 30.9%
Netherlands 11994 59.1% 37.9% 42.8% 31.2%
Spain 9252 60.2% 39.4% 43.5% 33.9%
Sweden 12953 58.6% 47.5% 42.8% 34.9%
Switzerland 12593 55.8% 45.4% 39.0% 37.4%
United Kingdom 44996 57.5% 47.8% 43.3% 40.8%
United States 323342 54.7% 49.5% 38.5% 44.8%
Average 59.1% 44.7% 43.4% 35.5%
Panel B: TP accuracy over time
2002 13397 51.7% 51.9% 37.0% 43.4%
2003 55627 58.7% 47.0% 41.3% 38.6%
2004 71176 53.8% 41.0% 36.1% 37.1%
2005 76067 62.0% 37.0% 41.9% 32.1%
2006 84237 63.2% 35.1% 41.7% 30.6%
2007 93770 50.2% 49.8% 36.1% 44.5%
2008 126561 48.0% 56.1% 35.3% 53.6%
2009 64883 72.8% 56.8% 64.0% 35.1%
Panel C: Pearson correlation coefficients between TP accuracy measures
Met_any aTPE Met_any_rev aTPE_rev
aTPE -0.311 1
0.000
Met_any_rev 0.726 -0.187 1
0.000 0.000
aTPE_rev -0.331 0.744 -0.243 1
0.000 0.000 0.000
The table presents the summary statistics of the target price accuracy measures. Panel A presents the mean values
for the four TP accuracy measures expressed in %. Met_any equals one if the actual stock price reaches the target
price at any time over the 12-month forecast period and zero otherwise. aTPE is the absolute target price forecast
error. Met_any_rev and aTPE_rev are the TP-revision-adjusted target price forecast accuracy measures. Panel B
presents the annual TP forecast accuracy values in %. Panel C presents the Pearson correlation coefficients
between the TP forecast accuracy measures.

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 TABLE 4
Descriptive statistics for explanatory variables
Panel A: Analyst and broker characteristics
A_exp A_#firm A_#Count B_#Ana
Australia 2.794 10.757 1.242 88.404
Austria 2.254 7.621 2.184 116.405
Belgium 2.705 7.567 2.219 92.756
Denmark 2.780 6.769 1.874 90.428
Finland 2.955 9.423 1.913 89.716
France 2.946 8.929 2.176 111.540
Germany 2.862 8.751 2.065 95.879
Hong Kong 2.517 8.679 1.345 95.410
Italy 2.557 8.450 1.665 95.128
Japan 3.532 13.834 1.029 94.557
Netherlands 2.927 9.294 2.342 100.713
Spain 2.465 8.950 1.959 103.236
Sweden 3.007 8.262 2.098 101.835
Switzerland 3.024 9.066 2.169 106.309
United Kingdom 2.791 10.165 1.993 125.905
United States 3.219 14.318 1.266 68.582
Average 2.833 9.427 1.846 98.550

(continued on next page)

49
 TABLE 4 (continued)

Panel B: Institutional and regulatory characteristics

Disclosure Enforcement Owner_con Legor UK Legor GE Legor FR Legor SC PDI IDV UAI MAS
Australia 0.806 -0.250 0.280 1 0 0 0 36 90 51 61
Austria 0.607 -1.650 0.510 0 1 0 0 11 55 70 79
Belgium 0.695 -1.890 0.620 0 0 1 0 65 75 94 54
Denmark 0.729 -0.560 0.400 0 0 0 1 18 74 23 16
Finland 0.810 -0.220 0.340 0 0 0 1 33 63 59 26
France 0.770 -0.990 0.240 0 0 1 0 68 71 86 43
Germany 0.678 -2.920 0.500 0 1 0 0 35 67 65 66
Hong Kong 0.730 0.100 0.540 1 0 0 0 68 25 29 57
Italy 0.680 -3.550 0.600 0 0 1 0 50 76 75 70
Japan 0.709 0.160 0.130 0 1 0 0 54 46 92 95
Netherlands 0.732 -0.190 0.310 0 0 1 0 38 80 53 14
Spain 0.697 -3.650 0.500 0 0 1 0 57 51 86 42
Sweden 0.830 0.550 0.280 0 0 0 1 31 71 29 5
Switzerland 0.761 -0.390 0.480 0 1 0 0 34 68 58 70
United Kingdom 0.831 1.160 0.150 1 0 0 0 35 89 35 66
United States 0.738 1.210 0.120 1 0 0 0 40 91 46 62
Average 0.738 -0.818 0.375 0.250 0.250 0.313 0.188 42.063 68.250 59.438 51.625

(continued on next page)

50
 TABLE 4 (continued)

Panel C: Other explanatory variables

TP/P (%) MV ($) F_#Ana MOM COV Mkt ret Fin_cris
Australia 19.1% 4811.0 11.574 -0.006 0.082 0.071 0.451
Austria 17.2% 6472.4 14.328 -0.028 0.096 0.074 0.559
Belgium 9.1% 11246.6 16.088 -0.012 0.069 0.032 0.455
Denmark 19.8% 6368.1 15.428 -0.020 0.082 0.058 0.573
Finland 11.6% 8168.0 17.583 -0.019 0.076 0.012 0.487
France 16.0% 13447.8 17.868 -0.009 0.070 0.027 0.438
Germany 16.6% 12239.8 18.901 -0.013 0.085 0.081 0.493
Hong Kong 14.2% 6673.6 16.980 0.048 0.080 0.150 0.269
Italy 13.7% 12148.8 16.834 -0.026 0.075 -0.033 0.547
Japan 14.6% 8265.3 13.559 -0.018 0.078 -0.016 0.410
Netherlands 14.2% 12861.8 18.177 -0.001 0.071 0.051 0.350
Spain 16.7% 14027.1 18.681 0.004 0.064 0.084 0.409
Sweden 13.6% 7810.6 16.873 0.012 0.078 0.102 0.528
Switzerland 22.4% 17361.1 17.461 -0.006 0.069 0.044 0.448
United Kingdom 15.5% 10724.2 15.864 0.001 0.075 0.048 0.446
United States 19.7% 7967.5 15.417 0.004 0.085 0.043 0.328
Average 15.9% 10037.1 16.351 -0.006 0.077 0.052 0.450
The table presents the descriptive statistics for the explanatory variables related to analyst TP forecast accuracy. Panel
A presents the mean values of the independent variables related to analyst and broker characteristics, and institutional
and regulatory characteristics. We calculate averages at TP forecast level (i.e. using characteristics measured at each
TP forecast issue). A_exp is analyst firm-specific forecasting experience, A_#firm is the number of firms the analyst
follows, A_#Count measures in how many countries the firms that an analyst follows are located, and B_#Ana is the
number of analysts employed by a broker. Panel B shows the mean values for institutional and regulatory
characteristics. Disclosure is the country’s accounting disclosure quality index, Enforcement is the accounting
enforcement index, and Owner con is the ownership concentration index. Legor UK, Legor GE, Legor FR and Legor SC
reflect the respective English, German, French and Scandinavian origin of the legal system. PDI is power distance,
IDV stands for individualism, UAI for uncertainty avoidance, and MAS for masculinity. Panel C presents the mean
values for the remaining explanatory variables. TP/P is the ratio of target price to actual price at the forecast issue
date less one expressed in %. MV ($) is the firm market capitalization at the TP forecast issue date expressed in USD
million, F_#Ana is the number of analysts following a firm. MOM is buy-and-hold return for 90-days before the TP
issue date, and COV is the (standardized) stock price variation. Mkt ret is the market index return over 12-months
after the forecast issue date, and Fin cris is an indicator variable equal to 1 if the forecast is issued after 1st September
2007.

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 TABLE 5
Accuracy of analyst TP forecasts compared to the accuracy of naïve price forecasts

Met_any≥naïve Met_any aTPE − sim_aTPE Met_any_rev≥naïve Met_any_rev aTPE_rev − sim_aTPE_rev

Mean p Mean p Mean p Mean p
Australia 0.789 0.000 -0.182 0.000 0.691 0.000 -0.152 0.000
Austria 0.736 0.000 -0.184 0.000 0.663 0.000 -0.174 0.000
Belgium 0.727 0.000 -0.058 0.000 0.668 0.000 -0.076 0.000
Denmark 0.710 0.000 0.004 0.691 0.629 0.000 0.013 0.302
Finland 0.787 0.000 -0.146 0.000 0.709 0.000 -0.173 0.000
France 0.748 0.000 -0.106 0.000 0.684 0.000 -0.109 0.000
Germany 0.764 0.000 -0.133 0.000 0.696 0.000 -0.133 0.000
Hong Kong 0.816 0.000 -0.199 0.000 0.744 0.000 -0.199 0.000
Italy 0.677 0.000 -0.044 0.000 0.624 0.000 -0.039 0.000
Japan 0.743 0.000 -0.093 0.000 0.683 0.000 -0.084 0.000
Netherlands 0.751 0.000 -0.116 0.000 0.684 0.000 -0.109 0.000
Spain 0.731 0.000 -0.018 0.003 0.672 0.000 -0.021 0.003
Sweden 0.755 0.000 -0.142 0.000 0.686 0.000 -0.136 0.000
Switzerland 0.742 0.000 -0.040 0.000 0.685 0.000 -0.041 0.000
United Kingdom 0.733 0.000 -0.010 0.000 0.681 0.000 0.005 0.160
United States 0.713 0.000 -0.101 0.000 0.627 0.000 -0.040 0.000
Average 0.745 0.000 -0.098 0.043 0.677 0.000 -0.092 0.029
The table compares the accuracy of analyst target prices to the accuracy of naïve price forecasts that extrapolate past firm performance into the future. The naïve
price forecast predicts that the stock price in twelve months will be equal to the stock price at the forecast release date times one plus the previous 12-month buy-
and-hold return. We calculate Met_any and aTPE, and Met_any_rev and aTPE_rev equivalents of the naïve price forecast, i.e. naive Met_any and naive aTPE, and naive
Met_any_rev and naive aTPE_rev. The Met_any≥naïve Met_any columns present the average proportion of TP forecasts that meet or exceed the accuracy of naïve price
forecasts based on the Met_any accuracy measure. The aTPE − naïve aTPE columns present the average difference between the absolute TP error and the error of
the naïve price forecast. Columns Met_any_rev≥naïve Met_any_rev and aTPE_rev − sim_aTPE_rev replicate the analysis for Met_any_rev and aTPE_rev. p is the p-value
for the significance of the difference between the accuracy of the analysts’ TP forecasts and of the naïve price forecasts.

52
 TABLE 6
Analyst target price accuracy regressions
Main TP accuracy measures TP accuracy measures adjusted for TP forecast revisions
Met_any aTPE Met_any_rev aTPE_rev
Exp.sign Est St.Eff p Est St.Eff p Est p Est p
Intercept -0.069 0.879 0.414 0.000 0.347 0.358 0.502 0.000
ln A_exp +/- 0.001 0.08% 0.912 -0.008 -1.88% 0.000 -0.010 0.350 -0.008 0.000
ln A_#Firm ?/? 0.039 2.49% 0.005 -0.009 -2.01% 0.000 0.022 0.088 -0.007 0.000
ln A_#Count -/+ -0.001 -0.02% 0.982 0.006 0.95% 0.057 0.048 0.019 0.011 0.000
ln B_#Ana +/- 0.058 6.24% 0.000 -0.000 -0.02% 0.946 0.040 0.000 -0.005 0.000
Disclosure +/- 1.878 7.31% 0.000 -0.120 -1.69% 0.057 1.545 0.000 -0.283 0.000
Enforcement +/- 0.002 0.21% 0.962 0.003 1.30% 0.564 -0.003 0.914 0.001 0.827
Owner con -/+ 0.350 5.11% 0.257 0.017 0.88% 0.706 -0.160 0.521 -0.062 0.142
Legor GE -/+ -0.284 -9.80% 0.002 -0.010 -1.28% 0.416 -0.163 0.034 0.011 0.308
Legor FR -/+ -0.374 -11.54% 0.001 -0.007 -0.77% 0.699 0.026 0.783 0.023 0.176
Legor SC -/+ -0.485 -10.11% 0.000 0.010 0.76% 0.575 -0.227 0.031 0.024 0.183
PDI -/+ -0.009 -8.58% 0.002 0.000 1.15% 0.445 -0.010 0.000 0.001 0.051
IDV -/+ -0.007 -13.15% 0.000 0.000 0.82% 0.658 -0.010 0.000 0.000 0.196
UAI +/- 0.012 20.35% 0.000 -0.001 -5.75% 0.019 0.006 0.003 -0.002 0.000
MAS -/+ -0.004 -6.89% 0.018 0.000 0.41% 0.811 0.002 0.236 0.000 0.207
aEPS -/+ -1.625 -6.55% 0.000 0.745 10.84% 0.000 -1.190 0.000 0.571 0.000
TP/P -/+ -0.964 -45.90% 0.000 0.259 44.49% 0.000 -1.246 0.000 0.333 0.000
ln MV +/- -0.117 -19.30% 0.000 -0.017 -10.36% 0.000 -0.155 0.000 -0.010 0.000
ln F_#Ana +/- 0.146 9.20% 0.000 0.016 3.66% 0.000 0.150 0.000 0.006 0.036
MOM ?/? 0.304 7.40% 0.000 -0.010 -0.88% 0.068 0.273 0.000 -0.003 0.560
COV +/+ 2.290 14.16% 0.000 0.476 10.61% 0.000 2.155 0.000 0.303 0.000
Mkt ret +/- 1.701 39.98% 0.000 -0.129 -10.97% 0.000 2.521 0.000 -0.423 0.000
Fin_cris -/+ -0.081 -3.94% 0.013 0.076 13.33% 0.000 0.003 0.909 0.047 0.000
Industry dummies Yes Yes Yes Yes
Year dummies Yes Yes Yes Yes
N 585718 585718 585718 585718
p-value 0.000 0.000 0.000 0.000
R2 6.40% 31.87% 7.42% 40.55%
The table shows the coefficient estimates (Est) from the analyst TP accuracy regressions in Equation (5). Exp.sign shows the predicted direction of the relation, and p
are p-values based on analyst- and firm-clustered standard errors (Petersen, 2009). St.Eff are the standardized coefficients when variables are standardized so that
their variances equal one. The Met_any columns present the results from the logit model predicting the likelihood that the stock price will meet the target price at any
time over the 12-month forecast period.
(continued on next page)

53
 TABLE 6 (continued)

Column aTPE present the results from OLS regressions where the dependent variable is the absolute TP forecast error in log form, aTPE. Columns Met_any_rev and
aTPE_rev show results for the TP forecast accuracy measures Met_any and aTPE that account for the TP forecast revisions before the end of the 12-month forecast
period. aTPE_rev is used in log form. The explanatory variables are described in Table 1 and ln indicates a logarithmic transformation of a variable. N is the number
of observations, p-value the corresponding p-value for model specification and R2 is the R-squared.

54
 TABLE 7
Robustness analysis for analyst target price accuracy regressions
2SLS Country effect
Met_any aTPE Met_any_rev aTPE_rev Met_any aTPE aTPE_ma
Est p Est p Est p Est p Est p Est p Est p
Intercept 0.008 0.961 0.408 0.000 0.243 0.104 0.492 0.000 0.605 0.000 0.317 0.000 -0.000 1.000
ln A_exp 0.010 0.136 -0.011 0.000 0.005 0.429 -0.010 0.000 -0.001 0.963 -0.008 0.000 -0.015 0.000
ln A_#Firm 0.027 0.005 -0.012 0.000 0.016 0.076 -0.009 0.000 0.038 0.005 -0.008 0.000 -0.003 0.380
ln A_#Count -0.006 0.649 0.007 0.004 0.026 0.024 0.011 0.000 0.018 0.425 0.003 0.300 0.003 0.596
ln B_#Ana 0.036 0.000 0.000 0.670 0.027 0.000 -0.004 0.000 0.059 0.000 -0.000 0.780 -0.004 0.020
Disclosure 1.060 0.000 -0.054 0.087 0.865 0.000 -0.233 0.000
Enforcement 0.004 0.713 0.003 0.154 -0.000 0.962 0.000 0.794
Owner con 0.242 0.009 0.017 0.311 -0.079 0.344 -0.065 0.000
Legor GE -0.179 0.000 -0.009 0.157 -0.110 0.001 0.015 0.010
Legor FR -0.294 0.000 -0.002 0.811 -0.042 0.296 0.032 0.000
Legor SC -0.342 0.000 0.002 0.795 -0.174 0.000 0.022 0.012
PDI -0.005 0.000 0.000 0.344 -0.005 0.000 0.001 0.000
IDV -0.004 0.000 -0.000 0.868 -0.006 0.000 0.000 0.044
UAI 0.008 0.000 -0.001 0.000 0.005 0.000 -0.002 0.000
MAS -0.003 0.000 0.000 0.681 0.000 0.448 0.000 0.004
aEPS -1.159 0.000 0.798 0.000 -0.894 0.000 0.606 0.000 -1.645 0.000 0.745 0.000 0.920 0.000
TP/P -0.528 0.000 0.233 0.000 -0.676 0.000 0.316 0.000 -0.965 0.000 0.259 0.000 0.499 0.000
ln MV -0.071 0.000 -0.018 0.000 -0.095 0.000 -0.011 0.000 -0.117 0.000 -0.017 0.000
ln F_#Ana 0.086 0.000 0.017 0.000 0.094 0.000 0.008 0.000 0.152 0.000 0.016 0.000
MOM 0.199 0.000 -0.021 0.000 0.197 0.000 -0.009 0.025 0.307 0.000 -0.011 0.053
COV 1.271 0.000 0.470 0.000 1.204 0.000 0.311 0.000 2.292 0.000 0.477 0.000
Mkt ret 1.008 0.000 -0.148 0.000 1.411 0.000 -0.433 0.000 1.710 0.000 -0.132 0.000
Fin_cris -0.063 0.000 0.072 0.000 -0.003 0.863 0.043 0.000 -0.081 0.013 0.076 0.000
Industry dummies Yes Yes Yes Yes Yes Yes No
Year dummies Yes Yes Yes Yes Yes Yes No
N 482017 482017 482017 482017 585718 585718 539118
p-value 0.000 0.000 0.000 0.000 0.000 0.000 0.000
R2 6.44% 31.92% 3.24%
This table presents the results of sensitivity analysis for the TP accuracy regressions. Est are the coefficient estimates and p are p-values based on analyst- and firm-
clustered standard errors (Petersen, 2009), and for analyst-clustered standard errors for 2SLS regression. Columns 2SLS presents the results from instrumental
variable regressions for Met_any and Met_any_rev. The Country effect columns present the results for TP accuracy regressions where we substitute the institutional and
regulatory characteristics for country dummies.
(continued on next page)

55
 TABLE 7 (continued)

Columns aTPE_ma present the results from an OLS regression where the dependent variable is the mean-adjusted TP forecast error, aTPE_ma. For aTPE_ma
regression, we adjust analyst characteristics, EPS forecast error and TP/P ratio by subtracting their related firm-year means. Variable definitions are in Table 1 and
ln indicates a logarithmic transformation of a variable. N is the number of observations, p-value is the p-value for model specification and R2 is the R-squared.

56
 TABLE 8
Persistence in analyst target price forecasting ability
Panel A: Quintile sorts on past TP accuracy
N aTPEt-1 (%) Met_any (%) aTPE (%)
aTPEt-1 1 96547 0.881 0.534 0.653
aTPEt-1 2 96479 0.523 0.559 0.523
aTPEt-1 3 96361 0.396 0.573 0.449
aTPEt-1 4 96411 0.292 0.571 0.392
aTPEt-1 5 96219 0.172 0.598 0.336
p(aTPEt-1 1 − aTPEt-1 5) 0.000 0.000
Panel B: Persistence in analyst ability to issue accurate target prices
Met_any aTPE Met_any aTPE
Est p Est p Est p Est p
Intercept 0.364 0.466 0.325 0.000 0.366 0.463 0.324 0.000
aTPEt-1 -0.297 0.000 0.082 0.000 -0.384 0.000 0.090 0.000
aTPEt-1*Fin_cris 0.298 0.000 -0.027 0.002
ln A_exp 0.011 0.381 -0.010 0.000 0.012 0.323 -0.010 0.000
ln A_#Firm 0.034 0.052 -0.009 0.000 0.034 0.050 -0.009 0.000
ln A_#Count -0.000 0.993 0.005 0.105 -0.000 0.996 0.005 0.105
ln B_#Ana 0.052 0.000 0.002 0.007 0.052 0.000 0.002 0.008
Disclosure 1.612 0.000 -0.023 0.716 1.578 0.000 -0.020 0.754
Enforcement 0.010 0.782 0.002 0.628 0.010 0.785 0.002 0.625
Owner con 0.415 0.210 0.018 0.678 0.417 0.207 0.018 0.681
Legor GE -0.309 0.002 -0.007 0.586 -0.311 0.002 -0.007 0.598
Legor FR -0.494 0.000 0.002 0.912 -0.497 0.000 0.002 0.900
Legor SC -0.558 0.000 0.002 0.930 -0.557 0.000 0.002 0.934
PDI -0.008 0.009 0.000 0.830 -0.008 0.010 0.000 0.846
IDV -0.007 0.001 0.000 0.680 -0.007 0.001 -0.000 0.657
UAI 0.013 0.000 -0.001 0.028 0.013 0.000 -0.001 0.028
MAS -0.006 0.004 0.000 0.797 -0.006 0.004 0.000 0.788
aEPS -1.676 0.000 0.751 0.000 -1.695 0.000 0.753 0.000
TP/P -1.012 0.000 0.258 0.000 -1.016 0.000 0.258 0.000
ln MV -0.120 0.000 -0.017 0.000 -0.119 0.000 -0.017 0.000
ln F_#Ana 0.138 0.000 0.019 0.000 0.135 0.000 0.019 0.000
MOM 0.315 0.000 -0.018 0.002 0.315 0.000 -0.018 0.002
COV 2.420 0.000 0.410 0.000 2.400 0.000 0.412 0.000
Mkt ret 1.644 0.000 -0.145 0.000 1.642 0.000 -0.145 0.000
Fin_cris -0.093 0.009 0.073 0.000 -0.196 0.000 0.083 0.000
Industry dummies Yes Yes Yes Yes
Year dummies Yes Yes Yes Yes
N 482017 482017 482017 482017
p-value 0.000 0.000 0.000 0.000
R2 6.73% 33.38% 6.75% 33.40%
The table examines the relation between past and current period target price accuracy. Panel A presents the results
from quintile sorts on mean aTPE for all TP forecasts issued by the analyst in the past calendar year, aTPEt-1. N is the
number of observations, Met_any equals one if the actual stock price reaches the target price at any time over the 12-
month forecast period and zero otherwise, and aTPE is the absolute target price forecast error. p(aTPEt-1 1 − aTPEt-1
5) is the p-value for the difference between the two extreme aTPEt-1 quintiles. Mean TP accuracy measures are
expressed in %.

(continued on next page)

57
 TABLE 8 (continued)

Panel B presents the regression results (Est) for target price accuracy regressions when we include average past aTPE
of all forecasts issued by the analyst, aTPEt-1. aTPEt-1*Fin cris is the interaction term between aTPEt-1 and the financial
crisis dummy. The Met_any columns present the results from the logit model predicting the likelihood that the stock
price will meet the target price at any time over the 12-month forecast period. The aTPE columns present the results
from an OLS regression where the dependent variable is the absolute TP forecast error in log form, aTPE. p are p-
values based on analyst- and firm-clustered standard errors (Petersen, 2009). Variable definitions are in Table 1 and ln
indicates a logarithmic transformation of a variable. N is the number of observations, p-value is the p-value for model
specification and R2 is the R-squared.

58