Target Price Accuracy

This study analyzes the accuracy of forecasted target prices within analysts’ reports. We compute a measurefor target price forecast accuracy that evaluates the ability of analysts to exactly forecast the ex-ante (unknown)12-month stock price. Furthermore, we determine factors that explain this accuracy. Target priceaccuracy is negatively related to analyst-specific optimism and stock-specific risk (measured by volatility andprice-to-book ratio). However, target price accuracy is positively related to the level of detail of each report,company size and the reputation of the investment bank. The potential conflicts of interests between an analystand a covered company do not bias forecast accuracy.