Relative valuation and analyst target price forecasts

We document that within industry relative valuations implicit in analyst target prices do provide investors with valuable information although the implied absolute valuations themselves are much less informative. Importantly, our findings are not merely a small stock phenomenon but apply to the sample of S&P 500 stocks and do not rely on trading at the exact time of announcement. Using a large database of target price announcements from 1997 to 2004, we construct a simple strategy based on target price implied relative valuations and show that the resulting abnormal return is both economically and statistically significant and not easily explained by transaction costs alone. (C) 2010 Elsevier B.V. All rights reserved.