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

Abstract

This paper aimed to investigate the effect of corporate governance mechanism on the risk of IPO earnings forecasts errors. It focuses on the relationship between the board of directors characteristics and the risk of earnings forecasts errors. Required data was gathered from 190 Malaysian IPO prospectuses for the year 2002 to 2012, after which data was analyzed using ordinary least squares (OLS) regression. Based on the obtained findings, the earnings forecasts of Malaysian IPO reflected a pessimistic picture with unsatisfactory percentage of accuracy. In particular, the findings of multiple regression analysis of the relationships between the size, independence and CEO duality of the board of directors, and the risk of earnings forecasts errors were negative and insignificant. The study findings have several implications for relevant individuals, including regulators, investors, financial analysts and financial statements users.In the same line of argument, errors in earnings forecasts have a likelihood of mitigating the reported earnings quality, their value upon which investment decisions are made and the investor confidence on the financial reports. But management earnings forecasts that are controlled through monitoring systems generate more reliable and quality earnings forecasts. More specifically, as internal corporate governance mechanisms, board of directors are in a good position to take on an effective monitoring role of keeping the management interests consistent with those of shareholders, lessening the opportunistic behavior of the former and in effect, improving the quality of the IPO earnings forecasts.The present study has theoretical and practical contributions in the several ways. The first contribution relates to the increasing recognition of the management earnings forecasts relevance as evidenced by their inclusion in the IPO companies prospectuses -however, studies addressing them are still few and far between (Gounopoulos, ass.ccsenet.org Asian Social Science Vol. 15, No. 11 2019