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D of Table I provides information on the frequency of inclusion of target prices in brokerage houses reports. The panel provides a transition matrix of brokerage house stock recommendations (the number at the top ofeach cell) and the percentage of these recommendations issued with price targets (the number at the bottom of each cell).6 Several interesting regularities are observed in this panel. First, price targets are overall more likely to be issued along with strong buy or buy recommendations (91 percent and 88 percent, respectively) than with hold (66 percent) or sell/strong sell (61 percent) recommendations. This is consistent with indings in Bradshaw (2002). Second, within recommendation categories, recommendation upgrades (lower-left cells) are more likely to be accompanied by a target price than are recommendation downgrades (upper-right cells). For example, price targets are included in 70 percent of the upgrade reports from hold to buy recommendations but only in 35 percent of the downgrade reports from buy to hold recommendations. This evidence is consistent with the common claim that analysts are biased toward issuing favorable news and withholding (or minimizing the amount of) bad news. The statistics on the diagonal indicate that virtually all recommendation reiterations include a target price, suggesting that analysts convey new and perhaps more subtle information that does not necessitate a recommendation revision via target price revisions.

Finally, the statistics in Panel D indicate that analysts are more likely to initiate or resume coverage with a strong buy or a buy recommendation (see McNi-chols and OBrien (1997), Barber et al. (2001)) and are also more likely to include a target price in these recommendations than with other cases.

B. Variable Descriptions

We construct two alternative measures for the information content ofanalysts target prices. The first, denoted TP/P, is the ratio of the announced target price to the stock price outstanding two days prior to the announcement (all prices are converted to the same split-adjusted basis). Since more than 90 percent of the

6 In computing these statistics, we employ the following procedures: (1) All recommendations outstanding in the database for more than one year are assumed invalid; (2) The most recent brokerage house recommendation is assumed to have been reiterated for target price reports that were not accompanied by a corresponding recommendation observation in First Calls recommendation database. The validity of this procedure was confirmed with an official at First Call who indicated that since target price revisions are issued more frequently than recommendation revisions, many target price revisions are recorded only in the target price database and, as long as the corresponding recommendation remains unchanged, First Call does not reiterate the existing recommendation in the recommendation database (see also Jegadeesh et al. (2001)); (3) Sell and strong sell recommendations were combined because of their relative rarity in the data; (4) Since some brokerage houses do not issue target price reports, we include only brokerage house/irm combinations with at least one target price report. While results are qualitatively similar, removing the latter restriction reduces the of-diagonal percentages. Note also that the transition matrix excludes recommendations marked by First Call as revisions from valid to dropped. This accounts for the diferent number of observations between Panel D and Panel A in Table I.

target price reports in the database are coded as one-year-ahead prices, this ratio may be interpreted as the analysts stated estimate of the firms annual expected return. The second measure attempts to capture whether investors react to information in the announced target price relative to the brokerage houses prior target price. This measure, denoted DTP/P, is the difference between the current and prior target price issued by the same brokerage house, deflated by stock price outstanding two days prior to the announcement.7

Panel A of Table II presents statistics on the two information measures as well as on the target price and earnings forecast revisions. We winsorize these variables at the 1st and 99th percentiles to mitigate the possible efect ofextreme observations. The statistics indicate that the distributions of both measures are right skewed. The average (median) target price is higher by 32.9 (25.5) percent relative to the preannouncement stock price. As a percentage of stock price, individual brokerage houses target prices are 0.8 percent higher than the previous target price.8 The third column presents additional information on the change in the brokerage house target price, scaling it in this case by the brokerage house previous target price, DTP/TP 1.The average (median) percentage change intar-get price is 5.3 (0) percent. Finally, in the fourth column we report summary statistics for the earnings forecast revision measured as the change in the analyst forecast ofearnings for the current iscal year delated by the stock price two days prior to the announcement. The mean (median) forecast revision is 0.41 ( 0.03) percent.

Panels B and C of Table II present additional information both for the level and change in target prices conditioned on the associated recommendation revision. In Panel B we report average target prices scaled by preannouncement stock price, TP/P. In general, the magnitude of the scaled target prices is consistent with the direction of the recommendation changes. For example, upgrades are generally associated with higher TP/P ratios than downgrades. Next, in Panel C we report for each recommendation revision averages of DTP/TP 1 as well as average price appreciation over the same period (since the issuance of the preceding target price). It can be seen that the average DTP/TP 1 and the stock price appreciation are consistently positive for upgrades and nearly always negative for downgrades. For example, an upgrade from a buy to a strong buy recommendation is associated with an average upward revision in DTP/TP 1 of 12.7 percent, whereas a downgrade from a buy to a hold recommendation is associated

7 We have also considered additional measures. The irst is the diference between a brokerage houses target price and the outstanding consensus target price immediately prior to the announcement. Consensus target price was calculated as the average target price outstanding over the previous 90 days across all brokerage houses. Other information measures are constructed by scaling each of the previous target price revisions by the prior-price standard deviation, measured over the 90 days preceding the event. We ind qualitatively similar results in Section II with all of these information measures.

8 In unreported results, we ind that only about ive percent of target price reports are issued below the concurrent stock price, approximately 25 percent of target price reports re-lect a downward revision from brokerage houses prior reports, and nearly 43 percent of target price reports relect a downward revision from the outstanding consensus target price.

with a downward revision of - 4.5 percent on average. Similarly, the average price appreciation over the period preceding the announcement is also consistent with the direction of the recommendation and target price revisions. For the upgrade from a buy to a strong buy recommendation, the associated stock price appreciation is 5.1 percent, whereas for the downgrade from a buy to a hold


Statistics on Target Prices byAnalyst Stock Recommendations

This table provides descriptive statistics on the target price information measures. Panel A provides general distributional statistics on (a) the ratio of target price to preannouncement stock price (stock price outstanding two days prior to the announcement of the target price), denoted (TP/P), (b) the change in the individual brokerage house target price scaled by preannounce-ment stock price, denoted (DTP/P), (c) the percentage change in the brokerage house target price, denoted (DTP/TP - 1), and (d) earnings forecast revision, computed as the difference in the brokerage house current and prior annual earnings forecast scaled by preannouncement stock price. Panel B provides information on the average TP/P conditional on stock recommendation revisions. Panel C reports, for each recommendation revision, averages of DTP/TP - 1 as well as average price appreciation measured over the same period (since the issuance of the preceding target price). All prices and earnings are converted to the same split-adjusted basis.

Panel A: Descriptive Statistics on

Measures of the Information Content of Target Price

Change in

Change in



Target Price to



Stock Price









(DTP/TP - 1)






- 0.41%





75th percentile









- 0.03%

25th percentile



- 0.8%

- 0.43%



- 89.0%

- 422.5%

Std. Dev.









Panel B: Average Target Price to Price Ratio (TP/P)

To Recommendation







Strong Buy














Sell/Strong Sell






as 1.43









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