The Recipe For Precision: A Study Of The Target Price Accuracy Of Professional Equity Analysts

Abstract

This paper examines the target price accuracy of Danish equity analysts and investigates whether certain variables and factors significantly affects their estimates. Previous research within the field has concluded that analysts adhere to a positive bias, ultimately resulting in target prices that are often not reached. However, since most previous studies have only been conducted with data available through financial databases, we believe several factors are yet to be adequately investigated. Our data consists of 434 hand-collected analyst reports on Danish companies, all authored by the Danske Bank Equity Research team and published between 2012 and 2021. This allows for rare insights into the budgeting assumptions of analysts, which enables us to include unique variables in our analysis and ultimately contribute to the existing literature. Our findings conclude that the target prices computed by Danske Bank analysts generally are inaccurate, and exudes a positive bias compared to consensus estimates and market return. These results, which primarily are based on statistical regression models and correlation analysis, are consistent with already existing literature. Additionally, we observe that target price accuracy differs across companies, with variables such as sector and stock volatility being the main drivers behind this. We also see increasing target price accuracy at companies with high analyst coverage. When observing variables specific to the analyst, we find that characteristics such as age and companies covered likewise affect the target price accuracy negatively. While we are not able to find significant proof that one certain valuation methodology ensures more accurate estimates of target price, we do find a significant correlation between target price inaccuracy and the spread between historic and estimated metrics such as revenue growth, ROIC, and EVA. This indicates that analysts who base their estimates closely to the historical figures of the company, end up achieving target prices that are significantly more precise, suggesting that the virtue of conservative estimation is advantageous for realizing accurate target pricing