Accuracy of european stock target prices

Abstract

Equity researches are conducted by professionals, who also provide buy/hold/sell recommenda- tions to investors. Nowadays, target prices determined by nancial analysts are publicly available to investors, who may decide to use them for investment purposes. Studying the accuracy of such analysts' forecasts is, thus, of paramount importance. Based upon empirical data on 50 of the biggest (larger capitalisation) European stocks over a 15{year period, from 2004 to 2019 and using a panel data approach, this is the rst study looking at overall accuracy in European stock markets. We nd that Bloomberg's 12-month consensus target prices have no predictive over future market prices. Panel results are robust to company xed e ects and sub-period analysis. These results are in line with the (mostly US-based) evidence in the literature. Extending common practice, we perform a comparative accuracy analysis, comparing the accu- racy of target prices with that of simple capitalisations of current prices. It turns out target prices are not better in forecasting, than simple capitalisations. More interestingly, by analysing also the relationship between both measures { target prices and capitalised prices { we nd evidence that capitalised prices partially explain how target prices are determined. Even when considering individual regressions, accuracy is still very low, but varies considerably across stocks.