An examination of analysts’ target price forecasts after accounting misstatements

I investigate the magnitude, accuracy, and informativeness of analysts’ target price forecast revisions after material negative accounting misstatements. Although prior researchers find that analysts’ earnings forecasts decline after misstatements, the effects of misstatements upon analysts’ target price forecasts have not yet been investigated. Relative to analysts’ target price forecasts for control firms, I find that analysts decrease their target price forecasts more sharply for misstating firms. Although analysts’ target price forecast revisions are somewhat less accurate for misstating firms, I find that analysts’ target price forecast revisions for misstating firms remain informative to the stock market. Several misstatement and target price forecast characteristics (misstated account, misstatement intention, SEC investigation, and CEO turnover after misstatement) affect the average magnitude, accuracy, and informativeness of analysts’ target price forecast revisions. These findings inform investors regarding the extent to which they may effectively rely upon analysts’ target price forecasts after material negative accounting misstatements and contribute to our knowledge of the value relevance of historical accounting and future earnings expectations for sell-side analysts.