INVESTMENT VALUE OF COMBINING ANALYSTS’ STOCK RECOMMENDATIONS AND TARGET PRICES

Abstract

Current finance literature supports the notion that analysts are able to furnish information not already reflected in current market prices. Previous studies have shown that analysts convey information to market participants through their outputs of stock recommendations and target prices. However, these two outputs do not contain the same set of information. This situation arises because: analysts (1) exhibit differential target price and recommendation abilities and (2) possess diverse motive when issuing target prices and recommendations. This study extends the current literature by documenting that investors can extract more from analyst reports by combining the distinct information contained in analyst recommendations and target prices. Using comprehensive recommendation and target price data available for companies which are listed on the NYSE, NASDAQ and AMEX from January 1997 to December 2003, we are able to quantify the differences in information contained in recommendations and target prices. We also find that investment strategies which combine the distinct information present in recommendations and target prices are able to generate greater abnormal returns than those based solely on stock recommendations or target prices. Although such returns are robust to various forms of investment strategies, they are not reliably greater than zero when adjusted for transactions costs.