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Forum | Papers » Accuracy and bias of equity analysts in an environment characterised by higher disclosure. Empirical evidence from the Italian market

Accuracy and bias of equity analysts in an environment characterised by higher disclosure. Empirical evidence from the Italian market

Paola De Vincentiis
March 2010 - n°3
Jel codes: G14, G24

Thousands of reports are published yearly, providing trading advice to investors and forecasts concerning the future market price of stocks (the so called target prices). Using a database of reports concerning blue chips listed on the Italian stock market, we have measured the forecasting ability of equity analysts in determining target prices. After having outlined considerable levels of inaccuracy, we have explored the weight of the various factors potentially affecting the accuracy of different analyst firms, working on two alternative assumptions: the no-conflict hypothesis (the analysts’ errors are due to the intrinsic difficulty of the task) and the conflict-of-interest hypothesis (the analysts’ errors are partly or mainly due to an optimistic bias aimed at securing/retaining investment banking clients or at boosting trading activity). In a context of generalised excessive optimism of equity analysts, our evidence supports the first hypothesis, showing even a certain over-pessimism of the most active traders and investment bankers.