Recommendations have also been shown to contain information that is generally orthogonal to the information in other variables known to have predictive power for stock returns (Jegadeesh et al. (2001)). Francis and Soffer (1997) focus on the relative informativeness of analyst earnings forecast revisions and stock recommendations and ind that each signal is informative in the presence of the other, while Stickel (1999) and Bradshaw (2000) examine the consistency between consensus recommendations and consensus earnings forecast revisions. We add to this research by examining the value and properties of analysts target prices. Our combined evidence indicates that target price revisions are informative and provide signiicant incremental information over and above that contained in stock recommendations and earnings forecasts.

The paper proceeds as follows. Section I describes the data. We examine the information content of target prices in Section II. Section III describes our coin-tegration approach to modeling the long-term comovement of target and stock prices.We combine the insights from the short- and long-term analyses in Section IV. Conclusions are offered in Section V.

I. Data and Variable Descriptions

A. Data Description

The target price, stock recommendation, and earnings forecast databases are provided by First Call.3 We report descriptive statistics in Table I for irms with available data on the Center for Research in Security Prices (CRSP) database. Panel A of that table provides information on the target price database. The year 1997 is the irst year with complete target price data (coverage begins in November 1996, with 3,862 target price reports for that year). Coverage increases substantially over time, from 49,134 target price reports in 1997 to 93,946 reports in 1999. The average number of price targets per covered irm (column 3) also increases from 10 in 1997 to 18 in 1999. The target price database is quite comprehensive and includes reports for 6,544 distinct firms. The number of participating brokerage houses remains fairly constant over the years, with an increase from 123 in 1997 to 149 in 1999 (column 5), with 190 distinct brokerage houses issuing target price reports across all years. Each firm in the sample is covered, on average, by six brokerage houses. Finally, we ind that these irms account for approximately 93 percent of the total market value of all securities on CRSP.

3 First Call has been a major supplier of analyst data to both practitioners and academics. First Call maintains that its data collection procedures place great importance on ensuring accuracy, especially with respect to the timing of the reports. Consequently, a distinguishing feature of the First Call database is that it codes the source of each analysts report as either real-time or batch. Real-time refers to reports that are received from live feeds such as the broker notes and that are dated as the date that the report was published. Batch reports are generated from a weekly batch ile from the brokerage house, and, hence, their precise publication dates are unknown. With technological improvements in First Calls data collection procedures, by 1999 the overwhelming majority of reports were being coded as real-time. To ensure accurate dating of analysts reports, our empirical analyses include only observations coded as real-time.

Panel B of Table I provides a description of the recommendation database. In 1997, the database includes 32,295 recommendations for 5,572 distinct irms. By 1999, the number of recommendations reaches 42,014 for 5,929 distinct irms. The

Table I

Descriptive Statistics on Analysts Target Prices, Stock Recommendations, and Earnings Forecast Revisions, 1997-1999

This table reports statistics on the First Call target price (Panel A), stock recommendations (Panel B), and earnings forecasts (Panel C) databases, as well as a transition matrix of analyst stock recommendations and target prices (Panel D) for firms with available data on CRSP. To ensure accurate dating of analysts reports, we include only observations coded as real-time (i.e., reports received from live feeds such as the broker note and that are dated as the date that the report was published). Panels A through C present, by year, the number of observations, the average number of reports per firm, the number of firms, the number of brokerage houses issuing reports, and the average number of brokerage houses per irm. The last row in each panel A-C presents statistics for the three-year sample period. Panel D presents the number of analyst stock recommendations (top number) and the percentage of those recommendations issued with a target price (bottom number), by changes in or reiterations of stock recommendations.

Panel A: Target Prices

To Recommendation

number of brokerage houses remains fairly constant over the years, with overall 325 distinct brokerage houses included in the database. Consistent with claims made by several analysts that certain brokerage houses that issue recommendations have either a formal or an informal policy barring issuance ofprice targets, the number of brokerage houses issuing recommendations is higher than those issuing price targets.4

Panel C of Table I provides a description of the earnings forecast revision database. The database includes 124,286 earnings forecasts for the period from 1997 to 1999. These forecasts are distributed, on average, as seven forecasts per irm and pertain to 9,167 distinct irms. These forecast revisions are issued by 282 distinct brokerage houses, with an average of seven brokers per covered irm.

Finally, while analyst reports always include a recommendation, they do not necessarily include a target price. In our sample, 135 of 325 brokerage houses do not issue any target price. Recommendations issued by these 135 brokerage houses, however, account for about ive percent of all recommendations.5 Panel

4 In unreported results, we ind that the majority of stock recommendations are issued as either buy or strong buy (68 percent), while only 29 percent are issued as a hold and three percent as a sell or strong sell. The median number of days between revisions is 59 days for target prices, 141 days for stock recommendations, and 92 days for earnings forecasts.

5 While we do not study the analysts decision to include a target price, we conjecture several possible reasons. First, according to conversations with analysts, some brokerage houses have an explicit policy prohibiting their analysts from issuing target prices. Second, analysts may choose to withhold the target price in circumstances where their cost of providing an ex post incorrect price target exceeds the potential beneits from issuing it. For example, if analyst compensation is related to the trading commissions generated in recommending securities for purchase and if incorrect target prices were ex post costly, then analysts would tend to issue target prices mainly with buy rather than with sell recommendations.

Table I {continued)

Panel D: Number of Stock Recommendations and Percentage Issued with Target Price