THE EFFECT OF ACCRUALS ON SECURITY ANALYSTS’ TARGET PRICE FORECAST PERFORMANCE

Using a sample of U.S. security analysts’ target price forecasts issued over the period 2000-2010, we examine how accounting accruals and accrual components affect security analysts’ target price forecast performance. In this study, we find that analysts’ target price forecasts for firms with higher accruals level are less accurate and have lower possibilities of being met or beat at some time during or at the end of the forecast horizon. With the deposition of accruals into short- and long-term accruals, our results show that both types of accruals lower the possibility of achieving analysts’ target prices at the end of the forecast horizon. However, only short-term accruals affect negatively the possibility of achieving analysts’ target prices at some time during the forecast horizon. These results suggest that the analysts fail to incorporate correctly the implications of the accrual information.