Voluntary Disclosure of Management Earnings Forecasts in IPO Prospectuses

Abstract

Asymmetric information and mechanisms for its resolution in the initial public offering (IPO) process are subjects of extensive research and debate. In this paper, we investigate the impact of one such mechanism, namely voluntary disclosure of management earnings forecasts by issuers of IPOs, as a means of reducing asymmetric information as well as ex ante uncertainty. Our focus is on the relative importance of this voluntary disclosure mechanism on both IPO underpricing and post-issue return performance. Our results indicate that management earnings forecasts provide important and incremental information compared to other means of reducing asymmetric information, and these disclosures appear to improve the environment of IPO issuance. For example, our underpricing results show that firms that choose to provide forecasts leave 'less money on the table' with a lower degree of underpricing. In terms of post-issue performance, firms whose forecasts turn out to be optimistic are penalized significantly relative to other forecasters and non-forecasters. Copyright Blackwell Publishers Ltd, 2003.

Shareholder litigation, management forecasts, and productive decisions during the initial public offerings

“…In addition, this paper complements several empirical international studies on forecast disclosure by IPO firms in low-litigation countries including Australia (Lee et al, 2003), Canada (Jog and McConomy, 2003), and New Zealand (Mak, 1996). These studies document that earnings forecast disclosure is much more frequent in initial public offerings when the litigation risk is lower, and their evidence supports the idea that IPO firms use forecasts to reduce information asymmetry and forecast disclosure is informative and value-relevant.…”

Ownership Structure and Earnings Forecast Accuracy: Evidence from Malaysian IPOs

“…The result of studies in New Zealand [9] and Canada [10] were found to be significantly less accurate compared to the results documented in Malaysia [2], Singapore [11] and Taiwan [12]. [1] and [13] suggested that managers in Malaysian IPOs in general are cautious forecasters because of strict regulation of IPOs in Malaysia and the fact that managers are personally accountable to the SC for their forecasts.…”

Seasonal affective disorder and the pricing of IPOs

“…Specifically, they find the auction mechanism used to go public is associated with less underpricing, a result they attribute to the additional information incorporated from recent market conditions. Also, recent studies, such as Cheng and Firth (2000), Firth (1998), and Jog and McConomy (2003), have examined the degree of information disclosure at the time of issuance. The idea is that little information is available about issuing firms; therefore, the firms have an incentive to disclose information in order to ensure a successful subscription and to receive the offer price they desire.…”