Curtis, A. and Simon, A. 2011. The Use of Earnings Forecasts in Stock Recommendations: Are Accurate Analysts More Consistent? Journal of Business Finance and Accounting, 38(1,2): 119-144 [CS.pdf]

ABSTRACT: We examine how analysts’ conflicting incentives to be either accurate or optimistic affect their choice to generate stock recommendations with rigorous valuation models or growth-based heuristics. Consistent with prior research, the average analyst recommendation is negatively associated with rigorous valuation models and positively associated with growth-based heuristics, we document that these associations are weakest for the most accurate analysts and strongest for the least accurate analysts. We also find evidence consistent with consistency between recommendations and valuation models underlying the positive future returns from trading on the most accurate analysts’ recommendations. Our results are consistent with reputation incentives to be accurate mitigating the use of optimistic growth-based models in generating stock recommendations.



Simon, A., Nekrasov, A., Clarkson, P., and Tutticci, I. What Influences Analysts' Target Prices? [CTS.pdf]

ABSTRACT: Using data on individual analyst’s we investigate the trade‐off between analyst’s short‐term forecasts and long‐term forecasts to derive target prices. We predict and find that analysts revise short‐term forecasts, long‐term forecasts and analysts’ target prices not necessarily congruently. Our results suggest that analysts use their long‐term forecast strategically to support a specific target price, especially in the face of contrary direction from the one‐year ahead earnings forecast. These findings are important as they give insights into the process by which analysts convert earnings forecasts into price forecasts.

Kim, J.B., Nekrasov, A., Shroff, P., and
Simon, A. Analysts’ Valuation of Conservative Earnings in Estimating Target Prices. [KNSS.pdf]

ABSTRACT: The paper examines whether financial analysts correctly undo the effect of accounting conservatism in their earnings forecasts in arriving at their target price forecasts. Based on prior findings, we consider alternative valuation models/heuristics that may be used by analysts to estimate target prices, e.g., the

forward P/E and the PEG ratio. Our evidence suggests that analysts fail to fully undo the effect of accounting conservatism embedded in their forecasts of earnings and earnings growth when estimating their target price forecasts. More sophisticated analysts adjust for the effect of conservatism to a greater extent than other analysts, although their target price forecasts also exhibit conservatism bias. In contrast, the market on average appears to correctly unravel the conservatism in future earnings when pricing securities. However, for extreme levels of conservatism, our evidence suggests that the under/overstatement of target prices leads to distortions of market prices.