The use of target prices to justify sell-side analysts' stock recommendations

This study examines a sample of 103 sell-side analysts' reports to document the frequency with which analysts disclose target prices as justifications for their stock recommendations. In addition, it investigates whether the degree of assessed overpricing or underpricing implied by target prices is related to the favorableness of stock recommendations. It is found that analysts use target price justifications in over 2/3 of the sample reports, and higher target prices are associated with more favorable stock recommendations. Further evidence suggests that analysts actually compute target prices using price-multiple heuristics such as "PEG." However, in reports that do not disclose target prices, estimates of target prices based on these heuristics are unable to justify the stock recommendations.