Earnings transparency and financial analysts' target price forecasts

Abstract

This paper examines the effect of earnings transparency on analysts' target price forecast properties. The issuance of target price forecasts by financial analysts is a very recent event and target price forecasts are regarded as the most summarized and explicit estimate of the postulated future value of the firm. The sample consists of financial analysts' forecasts of annual target price issued for firms listed on U.S. stock exchanges from 2001 to 2017. We measure each firm's earnings transparency as the contemporaneous co-movement between firm's earnings and change in earnings and stock returns, consisting in industry-specific and-neutral components in earnings-returns relation. Our results show that target price forecasts for more transparent earnings are less biased and more tend to attain the actual stock prices. These results demonstrate that earnings transparency is positively related with analysts1 target price forecasts. Our empirical results corroborate that more transparent accounting information help the market participants in forming more accurate and attainable forecasts. Our study extends the body of research studying the relation between analysts' forecast properties and the usefulness of accounting information by investigation target price forecasts.