Differential Effects of Target Price Releases on Stock Prices: Psychological Aspects
Differential Effects of Target Price Releases on Stock Prices: Psychological Aspects

Summary/Abstract: In the present study, we attempt to shed light on potential factors affecting how investors react to target price announcements made by security analysts. More specifically, the study focuses on cross-sectional differences between the magnitude of reactions for stocks whose prices have increased and reactions for stockswhose prices decreased immediately prior to such announcements. Employing a sample of target priceannouncements classified as "buy" (positive) recommendations for Israeli stocks, we document their significantlypositive effect on stock prices both on the day of the announcement and during a short period following the announcemen. The effect of target price releases is also found to be significantly stronger for smaller stocks.Moreover, we document that those stocks that have experienced positive cumulative abnormal returns prior totarget price releases yield significantly higher abnormal returns on average, both on the event day and during ashort subsequent period. We explain this finding by the effect of the availability heuristic on investors' perceptionsand decisions. Namely, we suggest that investors may expect target price releases to have a stronger effect on stock prices if these releases are preceded by stock returns of the same sign as the recommendation itself (makingthe recommendation more available, or in other words, subjectively more informative).

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