Earnings forecast disclosure regulation and earnings management: evidence from Taiwan IPO firms |
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Authors: | Bikki Jaggi Chen-lung Chin Hsiou-wei William Lin Picheng Lee |
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Institution: | (1) Faculty of Management School of Business, Rutgers University, New Brunswick Piscataway, NJ, 08854;(2) Department of Accounting, National Cheng Chi University, Taipei, Taiwan;(3) Department and Graduate Institute of International Business, National Taiwan University, Taipei, Taiwain;(4) Department of Accounting, Lubin School of Business, Pace University, New York, NY, 10038 |
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Abstract: | This study examines whether the Taiwanese regulation requiring disclosure of earnings forecasts in the IPOs resulted in disclosure
of more optimistic earnings forecasts and whether the forecast error was reduced more by manipulating the reported earnings
rather than revising the earnings forecasts to meet the forecast error threshold. The study is based on 759 forecasts issued
by the Taiwanese IPO firms from 1994 to 2001, i.e. 8-year period after the regulation was modified to increase the forecast
error threshold to 20%.
The findings show that the disclosure regulation resulted in more optimistic forecasts than conservative forecasts, especially
for firms expecting better performance in the forecast year compared to the previous year. Firms disclosing optimistic earnings
forecasts engaged more in manipulation of reported earnings than revision of forecasts to meet the forecast error threshold.
These findings thus suggest that the disclosure regulation resulted in earnings manipulation, which reduced the quality of
reported earnings.
We received valuable comments at the 2003 American Accounting Association and 2004 Euorpean Accounting Association annual
meetings. We also thank the participants at the research seminars at Rutgers University, City University of Hong Kong, and
Pace University, for their insightful comments. Picheng Lee especially thanks Pace University for 2003 summer research grant. |
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Keywords: | Earnings management Disclosure regulation Discretionary accruals Mandatory earnings forecasts Forecast error threshold |
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