The voluntary inclusion of earnings forecasts in IPO prospectuses*

Abstract

Abstract. This study examines empirically the role played by direct disclosure in the valuation of initial public offerings (IPOs). We investigate why some firms making an initial public offering in Canada inchide an eamings forecast in the offering prospectus and others do not, and, in particular, the role of such direct disciosures in IPO valuation. We explore several hypotheses motivated by the voluntary disclosure and signaling literatures. Our results are consistent with the hypotheses that (1) forecasters have "good news" to reveal about future eamings prospects relative to nonforecasters, (2) the earnings forecast signals are valuation relevant, and (3) the market is able to correct for expected forecast error or bias in the eamings forecast.Resume. Les auteurs font une analyse empirique du role que joue la presentation directe d'information dans revaluation des premiers appels publics a lepargne. Ils se penchent sur les raisoBS pour lesquelles certaines societes qui font appel public a I'epargne au Canada integrent a leiir prospectus d'emission des provisions de benefices, alors que d'autres ne le font pas, et ils s'interessent en particulier au role de la presentation directe de ce genre d'infomiation dans revaluation d'un premier appel public a I'epargne. Ils examinent plusieurs hypotheses inspirees d'ouvrages traitant de presentation volontaire d'information et d'indicateurs. Les resuitats obtenus sont conformes aux hypotheses selon lesqoeiles 1) ceux qui font etat de previsions ont de l'information positive a communiquer aa sujet des perspectives de benefices, contrairement a ceux qui ne font etat d'aucune prevision, 2) les indicateurs que representent les previsions de benefices sont pertinents a I'evalaatioE et 3) le tnarche a la capacite de corriger rinformation qu'il re^oit potir tenir compte des erreurs ou des distorsions anticipees dans les previsions de benefices. lotroduction Disclosure strategies and the valuation of initial public offerings are two areas of curreot interest in accounting and finance (e.g

The determinants of forward‐looking information in annual reports of UAE companies

“…Good news disclosures account for 97.5%, while 2.5% of forward-looking information is bad news. This argument has broad consistency with the findings in Clarkson et al (1992 and and Clatworthy and Jones (2003). Clarkson et al (1992 and argue that managers tend to publish favourable forward-looking information in their annual reports.…”

The perceived credibility of forward-looking performance disclosures

“…To assess consistency with prior literature, we only draw some general observations about the content. In our randomly selected statements, consistent with the evidence of Clarkson et al (1992), Clarkson et al (1994), and Clatworthy and Jones (2003), good news appears to dominate bad news. Of the randomly selected sample statements, 95% contain good news about the future.…”

“…In the UK information about current and future trading is typically given through such qualitative narrative statements, rather than through quantitative management earnings forecasts (Brennan 1999, Schleicher andWalker 2010). As FLPDs are qualitative and non-time specific in nature (Clarkson et al 1992, Clarkson et al 1994, Clatworthy and Jones 2003, it is harder for outsiders to effectively monitor their accuracy (Schleicher and Walker 2010, p. 271). This provides scope for assessing managerial incentives underlying FLPDs and the use of safeguards by investors when relying on such soft and less easily verifiable disclosures in the annual reports.…”

Corporate Ownership Structure and Accuracy and Bias of Mandatory Earnings Forecast: Evidence from Taiwan

“…Teoh, et al, 1998;Clarkson, et al, 1992). The relative importance of concealing private perquisite consumption and profits gleaned from over-priced shares cannot be known.…”