۱- Introduction

۲- Institutional background

۳- Literature review and hypotheses development

۴- Research design and data

۵- Empirical results

۶- Conclusion

References

Abstract

The purpose of this study is to examine whether the quality of corporate governance has an impact on target price accuracy. We explore the relationship between target price accuracy and ownership structure, board composition, and disclosure using a sample of 17,334 target price observations in the Taiwan Stock Exchange between 2007 and 2016. We find that strong corporate governance improves target price accuracy. We further show that firms with better corporate governance experience a stronger market reaction to their target price announcements.

Introduction

A target price forecast reflects a security analyst’s estimate of a firm’s stock price level over the forecast horizon, usually twelve months. It provides easy-to-interpret and direct investment advice. When making investment decisions, investors consider target price forecasts as one of the most important indicators. Brav and Lehavy (2003) suggest that target prices provide investors with analysts’ clear and precise statements on the magnitude of the company’s expected value. Asquith, Mikhail, and Au (2005) find that analyst reports play an important role in interpreting information from various sources and document strong market reactions to analyst reports. Despite the importance of target price, the literature documents that forecasted target price is usually optimistically biased; and there is an unsettled debate on the limited accuracy of target prices. Asquith et al. (2005) and Bradshaw, Brown, and Huang (2013) find that only around 50% of target prices are achieved within the following twelve months in the US stock markets. Bonini, Zanetti, Bianchini, and Salvi (2010) find a target price accuracy of 33.1% in the Italian stock markets. Kerl (2011) finds an accuracy of 56.5% in the German stock markets. There are relatively few studies that examine what determines target price accuracy, compared to the extensive literature on earnings forecasts (Bradshaw, 2004; Bradshaw et al., 2013). Previous research examined some of the factors that influence target price accuracy. For example, factors on analyst forecasting skills include the number of reports published by the analyst (Bonini et al., 2010), the collective reputation of analysts (Bonini et al., 2010), and past forecast accuracy (Bradshaw et al., 2013). The literature also examines factors relating to company risks, such as, company size (Bonini et al., 2010; Demirakos, Strong, & Walker, 2010; Kerl, 2011), and stock price volatility (Kerl, 2011). The above studies neglect the effect of a fundamental determinant of target price accuracy, namely corporate governance. Corporate governance is the arrangement of checks and balances. It minimizes and manages the conflicting interests between insiders and external shareholders and stakeholders. Specifically, corporate governance structure affects the accounting disclosure quality, aids users in assessing the quality of information, and guides analysts to more accurately forecast future performance. The accuracy of the target price ultimately relies on the quality of the information disclosed by the firm.