Korean brokerage analyst reports are excessively skewed toward rosy outlooks, with their target prices lacking realism, according to a new analysis. The findings suggest investors should interpret these reports selectively rather than accept them at face value.
“9 Out of 10 Reports Say Buy”… Optimistic Bias Entrenched
According to the Korea Capital Market Institute on Tuesday, Senior Research Fellow Kim Jun-seok analyzed approximately 740,000 corporate analysis reports from 2000 to 2024 in a study titled “Analyst Optimism, Accuracy, and Informativeness.”
The results showed that more than 90% of investment opinions were rated “Buy” or “Strong Buy.” Forecasts implying a “negative return,” meaning an expected stock price decline, accounted for only about 5% of the total.
“The share of ‘Buy’ and ‘Strong Buy’ investment opinions rose from 73% before 2014 to 91% after 2015, reinforcing and entrenching the optimistic bias,” Kim said.
Company coverage was also concentrated in large-cap stocks. As of 2024, 69% of all reports focused on the top 200 companies by market capitalization, while only 23% of KOSDAQ-listed companies received report coverage.
Target Prices ‘Optimistic’… Achievement Rate Below 20%
The problem is that these optimistic outlooks diverge significantly from actual performance.
According to the report, expected returns reflected in target prices since 2015 were on average about 30% higher than actual returns. Yet the probability of reaching the target price stood at just 19%.
The gap has widened over the long term. The target price achievement rate plunged from an average of 30.46% during 2000-2014 to 18.54% during 2015-2023. The rate at which stocks reached their target price at least once within a year also fell from 53.69% to 36.01% over the same period.
“Investors should look not simply at whether target prices have been raised, but at the change in implied returns relative to the current price,” Kim said. “A target price hike does not necessarily mean increased investment appeal.”
He also emphasized the need to watch out for an “illusion effect,” noting that “even when target prices are raised, if the stock price rises more, expected returns can actually decline.”
Conflict of Interest Structure Cited… “Information Exists but Impact Limited”
The report pointed to conflicts of interest as the backdrop for this optimistic bias.
“Factors such as enhancing revenue contributions to brokerages and building friendly relationships with companies under analysis can reinforce optimistic outlooks,” Kim said.
He added that with reports now being concentrated immediately after corporate earnings announcements, “the tendency for analysts to rely on company-provided information rather than independently produce information is also strengthening.”
Still, the informational value of the reports is not entirely absent. Changes in investment opinions, target prices, and earnings estimates were found to generate meaningful excess returns and trading reactions.
However, the impact was limited. Reports that produced meaningful changes in the actual market accounted for less than 10% of the total.
“Don’t Blindly Trust”… Investors Must Judge for Themselves
The researchers stressed that structural improvements are needed to restore the credibility of research.
“Joint efforts by brokerages, listed companies, and investors are needed to strengthen the economic functions and roles of analysts so they can contribute to the development of capital markets,” Kim said.
He further recommended that “evaluation and compensation systems linked to the accuracy, objectivity, and usefulness of provided information should be introduced, and disclosure of potential conflict-of-interest factors should be expanded.”
He also delivered a warning message to investors: “As analysts’ optimistic bias is strengthening, investors need to judge changes in the intrinsic value of companies themselves rather than blindly trust the numbers in reports.”
