Forecast Behavior and Target Price Accuracy in Danish Analyst Reports

Sarah Wassermann Hansen & Jakob Christian Kjeldsmark

Student thesis: Master thesis


This paper examines the forecast behavior of Danish equity analysts and the accuracy of their target prices. As aligned with previous research, we hypothesize that equity analysts are optimistically biased when forecasting future financials. Furthermore, we hypothesize that analysts’ forecasting behavior effect the validity of the issued target prices. The evaluation of the forecasting behavior is completed by assessing the difference between the historical and estimated level of the return on the invested capital (ROIC). Additionally, the analysis of analysts’ forecast behavior is also examined on a decomposed level of ROIC in terms of the operating profit margin (EBITmargin) and the turnover rate of the invested capital. Throughout this examination, we conclude that Danish equity analysts show significant optimistic forecast behavior, which in large is driven by analysts optimistic forecasting behavior on earnings rather than the turnover rate of the invested capital. Through OLS-regression we present that the overly optimistic forecasting behavior, in part, can be explained by the historical level of ROIC and the length of the budgeting horizon. Furthermore, this study finds a considerable inaccuracy of Danish equity analysts when estimating a future price target, as only 39% of the estimated target prices are met within a 12-month period. Our findings conclude that a significant proportion of reports where target prices are not met are buy-recommendations where the analyst has shown optimistic forecast behavior. This constitutes evidence of a link between optimistic forecast behavior and the accuracy of analysts’ target prices. Lastly, we investigate whether the magnitude of the bias in forecasts of the return on invested capital can predict the accuracy of the target price issued by analysts. Despite our hypothesis, we do not find a statistical link between forecasting behavior of analysts and the size of the target price error on analyst reports where target prices are not met.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2021
Number of pages168
SupervisorsThomas Plenborg