Going-concern initial public offerings

Willenborg, Michael; McKeown, James C.

doi:10.1016/s0165-4101(01)00014-3

Cited by 88 publications

(54 citation statements)

References 38 publications

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“…ROA is return on assets, measured as net income deflated by total assets. Based on prior research (e.g., Beatty, 1989;Willenborg, 1999;Willenborg & McKeown, 2001), we include control variables in eq. (4) to control for company size (SIZE), issue size (PRCD), risk (PEV and LEV), auditor reputation (BIG5), retention ownership (RTO), and profitability (ROA).…”

Section: Additional Analysesmentioning

confidence: 99%

The impact of the CSRC Regulation No. 12-1996 on the credibility of Chinese IPO earnings forecasts

Sun

Liu

2009

Global Finance Journal

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No. 12-1996). The Regulation No. 12-1996 (thereafter "the Regulation") imposes penalties on firms whose IPO earnings forecasts are significantly overestimated in their IPO prospectuses.Specifically, the Regulation requires that IPO firms and their auditors must explain and apologize to the public in a CSRC designated newspaper if predicted earnings are overestimated by 10 -20% compared to actual earnings. IPO firms will be penalized if earnings forecasts are overestimated by more than 20% and the overestimation is deemed to be a fraudulent activity. Auditors will also be penalized if they issue an inappropriate audit opinion on a client company's IPO earnings forecasts. The Regulation also prohibits IPO firms from using earnings forecasts as a basis for setting issuance price.Although the Regulation was promulgated to improve the reliability of earnings forecasts in Chinese IPO prospectuses, it remains an empirical question because the legal enforcement infrastructure is weak in China. Moreover, Chinese IPO firms are closely connected with the government, which may provide opportunities for them to override the Regulation. Hence, whether the Regulation can enhance the reliability of earnings forecasts is an empirical question. This study examines whether the Regulation has achieved its initial 2 IPO earnings forecasts from some Commonwealth countries seem less accurate than Chinese IPO earnings forecasts. For example, the mean absolute forecast error is 289% for the Australian forecasts (Hartnett, 1993), 100% for the New Zealand forecasts (Mak, 1989), and 88% for the Canadian forecasts (Pedwell, Warsame, & Neu, 1994).3 objective. We find that the Regulation has been efficacious in reducing the overestimation of IPO earnings forecasts after it was promulgated on December 26, 1996. We also document a significant improvement in earnings forecast accuracy resulting from the promulgation of the Regulation.This study contributes to the literature in the following ways. First, to the best of our knowledge, this is the first study to investigate whether a securities regulation in an emerging market can enhance the reliability of corporate financial disclosure. Since there is rare research into the effects of securities regulations on corporate disclosure, the promulgation of the CSRC Regulation No. 12-1996 provides us an opportunity to enrich this research topic.Second, we document evidence on the efficacy of the CSRC Regulation No. 12-1996. Our findings may provide implications for future regulation promulgation to the CSRC and other securities regulators of emerging markets. Third, this study adds to prior research on the economic determinants of forecast accuracy. Our study suggests some ex ante criteria for evaluating Chinese earnings forecast accuracy.The remainder of the paper is organized as follows. Section 2 introduces institutional background. The third section develops hypotheses. Section 4 discusses research design.

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Section: Additional Analysesmentioning

confidence: 99%

The impact of the CSRC Regulation No. 12-1996 on the credibility of Chinese IPO earnings forecasts

Sun

Liu

2009

Global Finance Journal

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“…Despite the significant increase in IPO mortality in recent decades (Fama and French 2004), few studies exist in documenting firm-specific factors predictive of IPO failures (Demers and Joos 2007). 4 While earlier studies make use of market signals (Seguin and Smoller 1997), intermediary (Willenborg and McKeown 2001;Weber and Willenborg 2003), as well as financial variables (Demers and Joos 2007), to predict IPO failures, we extend the current literature on intangible assets by suggesting that industry-specific non-financial variables are critical to IPO failures in the high tech sector. Our results indicate that variables of innovative capability, rather than financial variables, are key factors in predicting IPO failures in the biotech sector.…”

Section: Review Of Related Researchmentioning

confidence: 76%

Innovation capability and post-IPO performance

Guo

Zhou

2014

Rev Quant Finan Acc

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This paper studies how firms' innovation capability is related to their stock performance and eventual survival for a sample of biotech IPO firms. We create productrelated measures of firms' innovation capability by tracking the changes in R&D expenses, products, patents, strategic alliances, and product development stages for our sample firms, as disclosed in their IPO prospectuses and third post-IPO 10-K filings. We find that innovation capability is critical to contemporaneous stock performance and eventual firm survival. Biotech IPO firms are more likely to succeed in the long run, if they are able to expand the scale of their research undertakings and make progress in these research activities.

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“…In a recent IPO study, Willenborg and McKeown (2000) report a negative association between going-concern audit qualifications and first-day stock returns. They argue that firms with going-concern qualifications experience less ex ante uncertainty, that is, going-concern qualifications provide information to investors that reduces their ex ante uncertainty about the value of the IPO and lowers the underpricing of the IPO.…”

Section: Related Prior Researchmentioning

confidence: 99%

“…However, they differ on the information they evaluate. In Willenborg and McKeown (2000), the auditor has concerns about the long-term financial viability of the firm but not about its accounting. Thus, the auditor sends the valuable going concern ''signal'' through the audit report.…”

Section: Related Prior Researchmentioning

confidence: 99%

The relevance of quantifiable audit qualifications in the valuation of IPOs

et al. 2007

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How useful are audit qualifications to financial statement users? We analyze a sample of 204 firms that went public at the Athens Stock Exchange over the period 1987-2002. For 149 of these firms, auditors report quantitative estimates of the amount by which assets are overstated and/or liabilities are understated in reported financial statements. We find that underwriters and their affiliated analysts do not incorporate the negative information provided by these qualifications into offer prices and earnings forecasts. Investors, however, appear to efficiently impound the negative implications of the audit qualifications into stock market prices within the first day of trading. The results suggest that underwriters tend to align their interests with the interests of their clients, the old stockholders, at the expense of the new stockholders. They also suggest that the practice of reporting quantifiable qualifications in audit reports is valuable to investors given that they are disclosed by an expert.

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Going-concern initial public offerings

Cited by 88 publications

References 38 publications

The impact of the CSRC Regulation No. 12-1996 on the credibility of Chinese IPO earnings forecasts

The impact of the CSRC Regulation No. 12-1996 on the credibility of Chinese IPO earnings forecasts

Innovation capability and post-IPO performance

The relevance of quantifiable audit qualifications in the valuation of IPOs

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