Management earnings forecasts and IPO performance: evidence of a regime change

Abstract

Companies undertaking initial public offerings (IPOs) in Greece were obliged to include next-year profit forecast in their prospectuses, until the regulation changed in 2001 to voluntary forecasting. Drawing evidence from IPOs issued in the period 1993-2015, this is the first study to investigate the effect of disclosure regime on management earnings forecasts and IPO long-term performance. The findings show mainly positive forecast errors (forecasts are lower than actual earnings) and higher long-term returns during the mandatory period, suggesting that the mandatory disclosure requirement causes issuers to systematically bias profit forecasts downwards as they opt for the safety of accounting conservatism. The mandatory disclosure requirement artificially improves IPO share performance. Overall, our results show that mandatory disclosure of earnings forecasts can impede capital market efficiency once it goes beyond historical financial information to involve compulsory projections of future performance.

Determinants of Management Earnings Forecasts: The Case of Global Shipping IPOs

“…The coefficient on firm age ( AGE ) is negative and statistically significant. This finding confirms previous studies that report a positive relationship between forecast accuracy and age (Jaggi, ; Jelic et al ; Boubaker et al, ). Particularly in the shipping industry, one would expect that operational experience is reflected in more accurate earnings forecasts.…”

“…() and Boubaker et al . (). In particular, a change of the variable UND from zero to one, indicating a high underwriter reputation, increases the probability of forecasting earnings by 43%.…”

“…() and Li and McConomy () for Canada; Cormier and Martinez () for France; Boubaker et al . () for Greece; Jaggi (), Cheng and Firth () and Chen et al () for Hong Kong; Jelic et al () for Malaysia; Firth and Smith () for New Zealand; Firth et al . () for Singapore and the UK.…”

The accuracy of earnings forecast in IPO prospectuses: Evidence from Indonesia

“…This figure for Indonesia is far lower compared to other countries. Like the mean forecast error reported for Bangladesh 48 percent (Karim, Ahmed, & Hasan, 2013), Greece 39.72 percent (Boubaker et al, 2016), Thailand 35.76 percent (Lonkani & Firth, 2005), Australia 34.49 percent (Firth, Gounopoulos, & Pulm, 2012) and Malaysia 23.76 percent (Amer & Ahmad-Zaluki, 2017). On the other hand, the lower mean forecast error rates were found in Hong Kong 7.26 percent (McGuinness, 2005), Singapore 10.4 percent (Firth et al, 1995), Great Britain 10.70 percent (Jelic, 2014) and New Zealand 11.10 percent (Firth, 1997).…”

Firms in Transition: A Review of the Venture Capital, IPO, and M&A Literature

“…Evidence is mixed; studies find high level of forecasts errors in New-Zealand (Firth and Smith, 1992), optimistic errors in Australia (Lee, Taylor, Yee, and Yee, 1993) and in Thailand (Lonkani and Firth, 2005). Forecasts are not found to be optimistic in Greece (Boubaker, Gounopoulos, Kallias, and Kallias, 2017), in Hong Kong (Chan, Sit, Tong, Wong, and Chan, 1996;Jaggi, 1997), Australia (Hartnett and R€ omcke, 2000), Malaysia (Jelic, Saadouni, and Briston, 1998), and China (Chen and Firth, 1999). It appears that forecast precision has little to do with having a mandatory requirement, although some studies reach this conclusion.…”