Security analysts' target prices and takeover premiums

Most existing studies conclude that the accuracy of analysts' target prices is questionable. In forecasting target prices, analysts estimate a future stock price under the constraint of a time frame of usually 12 months. We exclude this source of uncertainty by focusing on valuations in takeover bids. We show that the expected returns by analysts are significantly related to the takeover premiums paid. A 5 percent higher target price is associated with a 1 percent higher takeover bid. The economic significance increases when we control takeover premiums for estimated synergy gains. Our results support the relevance of analysts' price forecasts.