The effect of disclosure regulation on the bias and accuracy of management earnings forecasts in Malaysian IPO prospectuses

Abstract

Purpose This paper aims to examine the impact of disclosure regulation on the levels of bias and accuracy in management earnings forecasts disclosed in the prospectuses of Malaysian initial public offering (IPO). Specifically, the authors investigated the two environments of regulation (mandatory versus voluntary) to draw some conclusions regarding the benefits of regulating disclosure of management earnings forecasts. Design/methodology/approach A sample of 111 Malaysian IPOs listing on the Main Market of Bursa Malaysia from January 1, 2004 to February 29, 2012 was used. The paper uses both univariate and multivariate statistical analyses on this sample of IPOs. Findings The empirical results of these multivariate regressions indicated that disclosure regulation has positive and significant impact on the bias and accuracy of management earnings forecasts disclosed in IPO prospectus. In general, the study results suggest that using disclosure regulation to improve the quality of IPO earnings forecasts can be, to some extent, an effective strategy. Practical implications The findings of this study have important implications for regulators and investors. The findings can provide them some relevant insights on the improvements to the earnings forecasts accuracy and trends of the forecast (optimistic or pessimistic) after the change from mandatory to voluntary disclosure. Thus, the authorities may learn whether this change is an effective policy or whether the regime of mandatory disclosure was better for IPO companies and should be reversed. Originality/value This study is regarded as the first attempt to investigate the impact of reforms in disclosure regulation on the quality of management earnings forecasts of IPO prospectuses in a developing nation such as Malaysia. In spite of this, the paper focuses on a single country, and it contributes significant insights to the debate about the credibility of IPO management earnings forecasts.

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).…”

“…Research on earnings forecasts by Amer & Ahmad-Zaluki (2017) concluded that earnings forecasts are quite relevant for shareholders. Earnings forecasts from management have a high probability to be used as a guide in making investment decisions.…”

“…It was found that leverage affects the accuracy of the earnings forecast. Then in Malaysia, Amer & Ahmad-Zaluki (2017) found that underwriter reputation, industry classifications, and auditor reputation affect the accuracy of earnings forecast.…”

“…So researchers want to re-examine the accuracy of earnings forecast and the factors that influence it with the latest data samples, namely companies that have IPO in Indonesia in the 2015-2018 period. By taking the 4 variables tested in Hasan, Hadad, & Ahmed (2016), add 3 variables from the research of Amer & Ahmad-Zaluki (2017) and add 1 variable by Warganegara & Warganegara (2014).…”

The Impact of the Board of Directors Characteristics on the Risk of IPO Earnings Forecasts Errors

“…Prior studies on the structure of board of directors failed to provide a complete perception of the board of directors as the primary responsible mechanism to enhance the earnings forecasts of the firms. Therefore, this study is an attempt to extend and support prior studies' findings and explanations (Ahmad-Zaluki & Wan Hussin, 2010;Bédard et al, 2008;Ammer & Ahmad-Zaluki, 2017) on the topic, as it furnishes evidence on the influence of the board of directors characteristics on the accuracy of management earnings forecasts.…”