The association between earnings forecast in IPOs prospectuses and earnings management: An empirical analysis

Abstract

This paper examines the level of earnings management for large IPOs that provide earnings forecasts and those that do not provide forecasts in the IPO prospectus. Using a sample of 368 IPO firms listed on the London Stock Exchange between 1985 and 2012, we find that the level of earnings management is lower for IPOs that provided earnings forecasts, than for those which did not provide a forecast. This evidence is robust, controlling for endogeneity and sample selection. Further tests reveal that IPOs that provide forecasts outperform their counterparts in the long run, using various long term performance measures. Overall, our results suggest that earnings forecasts at the time of listing convey useful information to investors on the quality of the company listing in the market.

Investor Sentiment and Earnings Management: Does Analysts’ Monitoring Matter?

“…Therefore, managers must consider the moment and the firm's situation as they manage earnings since earnings are eventually priced by the market (Sloan, 1996). Several are the incentives for management: managers' pay (Ali & Zhang, 2015;Dechow & Sloan, 1991;Jensen & Meckling, 1976), covenants (Dichev & Skinner, 2002;Fields et al, 2001;Nardi & Nakao, 2009;Sincerre, Sampaio, Famá, & Santos, 2016), regulatory issues (Huang, Lao, & McPhee, 2017;Rezende & Nakao, 2012), market expectations and valuation (Abarbanell & Lehavy, 2003;Almeida, Lopes, & Corrar, 2011;Buchner et al, 2017;Martinez, 2011;Mota et al, 2017), which are the object of analysis for empirical researches.…”

“…These findings are corroborated by Simpson (2013), when that author reinforces the vulnerability of small caps to investor sentiment and the increase of both abnormal and total accruals in periods of high sentiment. In addition to influencing the level of earnings management (Buchner et al, 2017;Martinez, 2011), the inhibiting role of analysts may have an influence on the opportunistic behavior of managers in moments of market optimism.…”

“…Ali and Gurun (2009) analysts' monitoring affects the relation between discretionary accruals and investor sentiment in the Brazilian market. This is a relevant theme because it contrasts the empirical view that demonstrates the positive association between investor sentiment and earnings management (Ali & Gurun, 2009;Simpson, 2013) with another one, in which analysts are capable of inhibiting the practice of earnings management (Buchner et al, 2017;Martinez, 2011). This study evaluates whether analyst coverage has an impact in the relation between investor sentiment and earnings management, that is, if it works as a variable that mediates such relation.…”

“…In this line of reasoning, some analyst-related evidences indicate that the number of analysts (Martinez, 2011) and earnings forecasts in IPO (Buchner, Mohamed, & Saadouni, 2017) are factors that inhibit the practice of earnings management. Since the role of analysts, among other things, is to issue information on firm prices and indicate if stocks should be bought or sold, they take profit as an indispensable input-be it for discounted cash flows or price-to-earnings multiples (Demirakos, Strong, & Walker, 2010;Sayed, 2017)-demanding that firms provide a better earnings report.…”

Improving Sustainability through a Dual Audit System

“…The controls include both financial and non-financial variables. Financial variables represent firm financial characteristics such as leverage, total assets, operating cash flow, and current profit or loss, that are likely associated with the dependent variable [26][27][28][29][30][31][32][33][34]. The non-financial variables include the largest shareholder, whether the firm is state-owned, frequency of board meetings, and whether the audit firm is a big four audit firm [35][36][37][38][39][40][41].…”