Can you Trust your Equity Analyst?

Abstract

Target prices of sell-side analysts is a topic in Academia that have previously received limited attention. Using a sample of 25 of the largest Danish companies, this study examines the overall accuracy and bias in target prices in the 11-year period from 2010- 2020. Based on an in-depth literature review, the study further examines whether 18 different analyst-, company and market characteristics can explain some of the variation in target price accuracy and bias. From the analysis of 17.667 target prices from 709 different sell-side analysts covering the Danish equity market, this study finds a sizeable inaccuracy amongst the analysts, with an average absolute target price forecasting error of 27,8%, while only 51,9% of the target prices are achieved within a 12-month period. Secondly, in contrary to Academia, this study finds a negative bias amongst analysts’ target prices as they on average underestimate their target prices with 10,7% and the expected return with 8,5 percentage points. This negative bias can partially be explained by exceptionally high returns over the period, combined with analysts having significantly lower expected returns compared to results found in previous studies. Through OLS and logistic regression, the study finds significant differences in target price accuracy among analyst and finds that specific groups of analysts, including men, local and experienced analysts, on average showcases superior target price forecasting capabilities, while this is also true for analysts working at independent broker firms. Furthermore, it is found that certain company and market characteristics including size, price multiples, volatility in key figures, company experience and share price volatility and -momentum have significant impact on analyst’s target price accuracy and bias, while initiating coverage reports are also found to be more precise