Download This PaperAnalysts’ EPS-decreasing exclusions and target price forecasts
Accepted at Management Science.
53 Pages Posted: 4 Jan 2021 Last revised: 30 Nov 2024
Date Written: November 10, 2024
Abstract
We examine the relation between individual analysts’ EPS-decreasing exclusions (i.e., exclusions which result in lower street EPS forecasts than GAAP EPS forecasts) and the optimism of their target price forecasts. We document that analysts’ EPS-decreasing exclusions from their annual forecasts mainly relate to positive non-recurring items already reported by the firm. We find that analysts’ EPS-decreasing exclusions are associated with more optimistic target prices. Our results also suggest that analysts’ EPS-decreasing exclusions contribute to the optimism in their target prices by enabling analysts to project higher earnings growth. Further analyses reveal that the relation between analysts’ EPS-decreasing exclusions and target price optimism is attributable, at least in part, to analysts’ strategic incentives for issuing favorable valuations.
Keywords: Growth, Analysts, EPS-decreasing exclusions, Target prices, Strategic incentives
JEL Classification: G10; M40; M41
Suggested Citation: Suggested Citation
