DIFFERENTIAL EFFECTS OF TARGET PRICE RELEASES ON STOCK PRICES: PSYCHOLOGICAL ASPECTS
AbstractIn 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 stocks
whose prices decreased immediately prior to such announcements. Employing a sample of target price
announcements classified as "buy" (positive) recommendations for Israeli stocks, we document their significantly
positive effect on stock prices both on the day of the announcement and during a short period following the
announcement. 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 to
target price releases yield significantly higher abnormal returns on average, both on the event day and during a
short subsequent period. We explain this finding by the effect of the availability heuristic on investors' perceptions
and 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
(making the recommendation more available, or in other words, subjectively more informative).
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