Does disclosure of earnings forecasts regulation affect the valuation of IPOs? Evidence from an emerging country

Abstract

PurposeThis paper aimed to explore the effect of a regulatory change pertaining to earnings forecasts disclosure from a mandatory to a voluntary regime on the valuation of Malaysian initial public offerings (IPOs).Design/methodology/approachThe study employed ordinary least square (OLS) regression and quantile regression to analyse the impact of disclosure of earnings forecasts regulation on the valuation of IPOs which comprised 458 IPOs reported for the period 2000–2017 on Bursa Malaysia.FindingsThis paper revealed that the regulatory change in forecasted earnings disclosure from a mandatory to a voluntary regime, effective from 1 February 2008, had a negative impact on the valuation of IPOs. The regime change did not improve the transparency of firms issuing IPOs. In fact, the absence of forecasted earnings information in most IPO prospectuses caused ex ante uncertainties to increase. Voluntary disclosure, however, had a significant positive relationship with the valuation of the IPOs issued during the global financial crisis period (2008–2010). Firms concealed their poor qualities by excluding forecasted earnings information from their prospectuses in order to have a fair valuation.Practical implicationsThe findings may be used by policymakers as guidance in improving the existing regulation regarding the disclosure of forecasted earnings.Originality/valueThis paper provides new insight on the effect of a regulatory change pertaining to earnings forecasts disclosure from a mandatory to a voluntary regime on the valuation of Malaysian IPOs. It also provides evidence that the regulatory change of earnings forecast disclosure affects the IPOs' values listed during the global financial crisis period.

Shariah-compliant status and investors demand for IPOs: the moderating role of regulatory quality

“…A stock is considered as under-priced when the offer price is lower than the closing price on the first day of listing. The dummy variable of pricing mechanism takes a value of 1 if the IPO was priced using the book-building mechanism, and 0 if it was priced using the fixed price mechanism (Pu and Wang, 2015; Ong et al , 2021).…”

Earnings forecast disclosures and oversubscription rates of fixed-price initial public offerings (IPOs): the case of Malaysia

“…Ammer and Ahmad-Zaluki (2017) posit that voluntary earnings forecast disclosures can be effective in improving the accuracy of earnings forecasts. However, a recent study by Ong et al (2021) found that under a voluntary regime, Malaysian IPOs that disclosed earnings forecasts were undervalued by underwriters due to investors' belief that the information on earnings forecasts in IPO prospectuses was inaccurate. It is difficult for earnings forecasts to be accurate due to unanticipated variables.…”