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  • Review of Accounting Studies

The Asymmetric Mispricing Information in Analysts’ Target Prices

By: Jeremiah Green, John R. M. Hand and Anywhere Sikochi
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Abstract

We study the mispricing information present in the target prices of U.S. and international analysts. We hypothesize that asymmetry in the value-relevance of the information that managers supply to analysts, combined with asymmetry in the incentives facing analysts to curry favor with managers, leads to analyst-claimed undervaluation being more predictive of future stock returns than analyst-claimed overvaluation. Our empirical tests isolate analyst-claimed mispricing by first removing analysts’ estimates of the cost of equity from the returns implied by target prices, then separating analyst-claimed undervaluation from overvaluation. We find that target prices only predict future returns (at 16¢ to 18¢ on the dollar) when analysts claim undervaluation, not when they claim overvaluation. We also observe that analyst-claimed undervaluation predicts future returns more strongly after firms experience low returns and when macro-driven valuation uncertainty is low.

Keywords

Analysts; Target Prices; Mispricing; Cost Of Equity; Valuation; Price; Cost; Analysis; Theory

Citation

Green, Jeremiah, John R. M. Hand, and Anywhere Sikochi. "The Asymmetric Mispricing Information in Analysts’ Target Prices." Review of Accounting Studies (forthcoming).
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About The Author

Anywhere Sikochi

Accounting and Management
→More Publications

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More from the Authors
  • Harambe: Mobilizing Capital in Africa By: Anywhere Sikochi
  • Performance Management at Afreximbank (B) By: Robert S. Kaplan, Siko Sikochi, Anna Ngarachu and Namrata Arora
  • Performance Management at Afreximbank (A) and (B) By: Robert S. Kaplan and Siko Sikochi
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