Independent and Investment-Bank Analysts' Target Prices

We provide new evidence on individual analysts' differential abilities to forecast firm value. We find that independent analysts' target prices perform well in predicting future price relative to investment-bank analysts. Our evidence suggests that, 12 months after their issuance, independent analysts' target prices are more likely to be met than those issued by investment-bank analysts in general and are more accurate than the target prices of affiliated investment-bank analysts, controlling for analyst characteristics. We also find that independent analysts' target prices are more likely to be met for firms with higher stock price momentum. In contrast, we find that the association between realized returns and the returns predicted by target prices does not differ for independent vs. investment-bank analysts. Moreover, independent analysts' target prices are less likely to be met and are less accurate for firms with higher volatility. Our evidence contrasts with prior literature which generally concludes that independent analysts' research is of lower quality. Yet, the market appears to react relatively less strongly to independent analysts' target price revisions. Our findings suggest that investors and researchers can benefit from understanding the properties of independent analysts' target prices, particularly for certain types of firms.