Earnings forecast disclosure regulation and earnings management: evidence from Taiwan IPO firms

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.     

Predicting Subsequent Management Forecasting Behavior at the Date of an Initial Public Offering

In this study, we examine the conditions and choices of firms at dates of initial public offerings (IPOs) as a basis for predicting their likelihood of management earnings forecast disclosure in post-IPO periods. Using a sample of 944 IPOs, we demonstrate that firms choosing to reduce IPO information asymmetries or signal issue quality by choosing prestigious underwriters, high quality auditors, and higher percentages of retained ownership tend to issue management forecasts in the post-IPO period. These relationships exist after controlling for IPO date measures of risk/stability, a construct that prior management forecast research has found to be a key determinant of the forecasting act.     

Performance of Malaysian IPOs: Underwriters reputation and management earnings forecasts

This paper examines the financial performance of Malaysian initial public offerings (IPOs) during the period 1980–1995. The major focus of the study is on the role of management earnings forecasts and underwriters in the valuation of IPOs. The results suggest extremely high and statistically significant initial premiums and positive and statistically significant long-term returns up to 3 years after listing. The findings for long-term returns contradict the consensus of the IPO literature that documents a significant negative long-term performance. Our results indicate a negative association of upward bias in management earnings forecasts with IPOs' performance during the first 12 months after the IPOs.     

The accuracy of earnings forecasts in IPO prospectuses on the Kuala Lumpur Stock Exchange

This paper examines the accuracy of earnings forecasts made by managers of Malaysian initial public offerings (IPOs) during the period 1984–1995. It is a mandatory requirement for Malaysian IPOs to furnish earnings forecasts together with the opinions thereon of the auditors and the lead underwriter in their prospectuses. Their accuracy is measured by forecast errors, absolute forecast errors, squared forecast errors and standardised forecast errors. The results suggest that, on average, managers under-forecast earnings by 33.37%. A comparison with the naive no change model in earnings suggests that 96 out of 122 companies outperform this model. A number of company specific characteristics (size, age, forecast interval, gearing, proportion of shares retained by owners, auditor reputation and industry) are tested. The results reveal that both the age and industry classification of the company are statistically significant, and that management earnings forecasts are particularly inaccurate where firms experience a decline in earnings. Key words: accuracy of prospectus earnings forecasts, initial public offerings, accounting in Malaysia.     

Earnings management in Malaysian IPOs: The East Asian crisis, ownership control, and post-IPO performance

We find evidence of income-increasing earnings management in Malaysian IPOs, which occurs primarily for IPOs during a period of severe economic stress (the East Asian crisis). Within the high-ownership-concentration Malaysian market, post-IPO control concerns also appear to constrain IPO earnings management: owners seem willing to accept reduced IPO proceeds and signaling opportunities to increase the likelihood of retaining control of the company post-IPO. The requirement to provide a profit guarantee does not seem to greatly affect earnings management. IPO companies engaging in aggressive income-increasing earnings management have significantly worse market-based performance than their more conservative counterparts, but again only for IPOs issued during the economic crisis period. Overall, the results suggest that personal liquidity concerns are an important factor in IPO decisions during the economic crisis.     

Voluntary Disclosure of Management Earnings Forecasts in IPO Prospectuses

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.     

Voluntary profit forecast disclosures,IPO pricing revisions and after-market earnings drift

Prospectus profit forecasts (PPF) constitute one of the most important discretionary disclosure items in an IPO. I examine such disclosures in the Hong Kong market, where both IPO activity and PPF disclosure rates are at high levels. The median forecast typically ‘underestimates’ future earnings by around 6%. More importantly, PPF disclosure exhibits a strong inverse association with pre-listing owners' retained equity levels (Hughes, 1986; and Li and McConomy, 2004). PPF disclosure is thus more likely in IPOs raising more capital and generating larger floats. I also demonstrate a strong link between PPF disclosure and post-IPO earnings drift.Ensuing forecast errors also bear strong connection with IPO coordinators' initial price determinations as well as with subsequent investor returns. This area usefully extends the related literature (Cheng and Firth, 2000; Chen, Firth and Krishnan, 2001; Jog and McConomy, 2003; Chong and Ho, 2007; and Gounopoulos, 2011), which stresses an association between forecast errors and initial investor returns but ignores the preceding price ‘determination’ process. It also suggests that forecast errors serve as a valuable ex-post proxy for the amount of ex-ante uncertainty surrounding issuer value (Beatty and Ritter, 1986; Falconieri, Murphy and Weaver, 2009). This study also demonstrates a connection between final offer price ‘determinations’ and the information content and “superiority” of PPFs (Brown, Richardson and Schwager, 1987). Finally, and in contrast to final offer price ‘determinations’, initial investor returns strongly anticipate post-IPO earnings drift.     

首发上市盈利预测制度变迁与公司盈余管理研究

本文研究盈利预测制度由强制性向自愿性披露的变化对首发上市公司盈余管理的影响。研究发现,在控制其他首发上市制度影响条件下,自愿性盈利预测制度使首发公司披露盈利预测的偏好明显下降,盈利预测高估程度明显降低,且激进会计政策选择偏好明显下降,公司盈余管理水平显著降低。研究表明,市场化信息披露制度改革有助于缓解公司盈余管理行为。     

Lockup and Voluntary Earnings Forecast Disclosure in IPOs

We examine the relation between lockup length and voluntary earnings forecast disclosures for IPOs in Singapore. Unlike firms in the United States, companies in Singapore are allowed to provide earnings forecasts in their IPO prospectuses. We find that forecasters are more likely to accept longer lockup periods, so that the lockup expires after the first post-IPO earnings announcement. Our study also shows that because the lockup agreement removes personal incentives to issue aggressive forecasts, IPO firms tend to issue conservative forecasts. Overall, our results suggest that the lockup mechanism adds credibility to the earnings forecast given in the IPO prospectus.     

Forecasts in IPO Prospectuses: The Effect of Corporate Governance on Earnings Management

Prior research suggests that managers may use earnings management to meet voluntary earnings forecasts. We document the extent of earnings management undertaken within Canadian Initial Public Offerings (IPOs) and study the extent to which companies with better corporate governance systems are less likely to use earnings management to achieve their earnings forecasts. In addition, we test other factors that differentiate forecasting from non‐forecasting firms, and assess the impact of forecasting and corporate governance on future cash flow prediction. We find that firms with better corporate governance are less likely to include a voluntary earnings forecast in their IPO prospectus. In addition, we find that while IPO firms use accruals management to meet forecasts; the informativeness of the discretionary accruals depends on whether or not the firm would have missed its forecast without the use of discretionary accruals.     

The Impact on IPO Performance of More Stringent Listing Rules with a Pre-listing Earnings Requirement: Evidence from Hong Kong

Abstract:  This study considers the impact of a change to listing rules covering IPO performance in the Hong Kong stock market. The change, introduced in 1994, imposed a three-year prelisting earning requirement on new issues. The objective of this research is to screen out a subset of poor IPO performers. We find there is no significant difference in performance between IPOs before and after the regulatory change. We further divide our sample of IPOs registered before the regulatory change into two sub-samples: those that did and those that did not fulfil the earnings requirement. The result shows that there is no significant difference in performance between the two IPO sub-samples. This implies that the existence of pre-listing earnings does not guarantee good long-term IPO performance and the pre-listing earnings of new issues is not an effective screen for 'bad' IPO performers. This study further analyses the rationale for rule change in the context of recent developments in the Hong Kong stock market and concludes that the rule change is part of the reform programme aimed at introducing a second board market for small companies and at attracting more China-related listings to the main board.     

An Empirical Analysis of the Bias and Rationality of Profit Forecasts Published in New Issue Prospectuses

Our study sets out to assess the accuracy of profit forecasts made by IPOs in Hong Kong. We use a variety of measures and tests to examine the accuracy, bias, rationality, and superiority of earnings estimates. The results show that forecast accuracy compares favourably with the findings from the developed economies of Australia, Britain, Canada, and New Zealand. Forecasts are shown to be superior to the predictions from time series models. IPOs tend to underforecast in the sense that actual profits exceed the forecasts. The rationality tests show mixed results. Cross-sectional analyses of forecast accuracy have poor explanatory power although the Big Six reporting accountants are associated with smaller forecast errors.     

Initial public offering prospectus forecast errors and mandatory explanations: evidence from New Zealand

This paper examines management forecast errors in initial public offering (IPO) prospectuses of New Zealand firms and subsequent management explanations for earnings forecast errors in recent years. New Zealand has several unique features and recent changes that are worthy of research, including the requirement for management to make forecasts; a requirement to explain differences between forecast and actual; and a recent change that provides the voluntary opportunity to obtain a negative assurance opinion on forecasts. Using hand-collected IPO data between 1998 and 2014, we find that firms that include a negative assurance opinion on the prospective financial information in the prospectus have more accurate earnings and cash flow forecasts. We investigate the subsequent explanations for forecast errors, which are mandated by a financial reporting standard. We show that management tends to attribute negative and large forecast errors to external causes rather than their own actions. Our findings have implications for regulators and investors in New Zealand and other settings.     

The Credibility of Earnings Forecasts in IPO Prospectuses and Underpricing

This paper provides empirical evidence of the impact of the voluntary disclosure of management earnings forecasts in IPO prospectuses and of the credibility of these forecasts, as perceived by investors at the time of the IPO. We measure forecast credibility ex ante with two approaches: (i) a vector of determinants of credibility that are observable by market participants at the time of the issue and (ii) the predicted value of the forecast error based on some of these determinants. Controlling for the firm's decision on whether or not to issue a forecast, we find that the issue of a forecast reduces underpricing. We find that the quality of the firm's governance and of the auditor and underwriter associated with the issue seems to act as a substitute to the disclosure of an earnings forecast in the prospectus, so that they significantly decrease the level of underpricing only for non‐forecasters. However, despite our various approaches to measure ex ante credibility, we find no association between the pricing of the issue and perceived forecast credibility at the time of the IPO.     

An Empirical Analysis of the Bias and Rationality of Profit Forecasts Published in New Issue Prospectuses

Our study sets out to assess the accuracy of profit forecasts made by IPOs in Hong Kong. We use a variety of measures and tests to examine the accuracy, bias, rationality, and superiority of earnings estimates. The results show that forecast accuracy compares favourably with the findings from the developed economies of Australia, Britain, Canada, and New Zealand. Forecasts are shown to be superior to the predictions from time series models. IPOs tend to underforecast in the sense that actual profits exceed the forecasts. The rationality tests show mixed results. Cross-sectional analyses of forecast accuracy have poor explanatory power although the Big Six reporting accountants are associated with smaller forecast errors.     

Mandatory CSR disclosure and analyst forecast properties: Evidence from a quasi-natural experiment in China

Based on a quasi-natural experiment that mandates a subset of listed firms to issue standalone corporate social responsibility (CSR) reports, we examine whether mandatory CSR disclosure improves analysts’ information environment. We focus on two properties of analysts’ earnings forecasts: forecast error and forecast dispersion. We find that the mandatory issuance of standalone CSR reports is related to less forecast error and less dispersed forecasts, and the effect varies with the firm-level information environment and province-level marketization. Additional tests show that the improvement in forecast properties is mainly driven by CSR reports that i) are of high quality and ii) contain more long-term-oriented information than other CSR reports. Our findings provide evidence that mandatory CSR disclosure plays an important informational role for financial analysts.     

The accuracy of IPO earnings forecasts in Thailand and their relationships with stock market valuation

In order to help reduce information asymmetry between managers and prospective investors, IPO prospectuses in Thailand are required to publish managers' forecasts of the forthcoming year's earnings. This type of direct disclosure is especially important in a developing economy such as Thailand where financial intermediaries and information vendors are relatively sparse, and where investors are rarely professionals. Our results demonstrate that managers' earnings forecasts are much more accurate than extrapolations of historical earnings. We show that forecast accuracy is related to underpricing, and it has a directional, but not statistical, association with one-year stock returns and one-year wealth relatives.     

The association between management earnings forecasts, earnings management, and stock market valuation: Evidence from French IPOs

This study investigates managers' motivations to engage in earnings management through purposeful interventions in the setting of discretionary accruals, in the context of initial public offerings (IPOs) in France. Firms issuing forecasts in their prospectuses are expected to differ from nonforecasters in the level of earnings management during the year following the public offering. Within the context of contracting theory, four research questions are addressed. First, are IPO firms issuing forecasts more inclined to manage earnings 1 year after an IPO compared to nonforecasting firms? Second, is a forecasting firm's level of earnings management conditioned by earnings-forecast deviation? Third, is earnings management by IPO forecasting firms affected by contractual and governance environments? Fourth, how do investors see through earnings management following IPO earnings forecasts, i.e., how do stock market participants value earnings components (i.e., nondiscretionary and discretionary accruals)? Our findings document that in the year following an IPO, the magnitude of earnings management is much higher for forecasters than for nonforecasters. Results also show that a firm's accrual behavior is affected by earnings-forecast deviation, but the relationship is moderated by contractual and governance constraints. Finally, it would appear that French investors do not adequately readjust the relationship between reported earnings and a firm's market value for the year in which earnings are subject to manipulations.     

Conflicts of Interest and Research Quality of Affiliated Analysts in the German Universal Banking System: Evidence from IPO Underwriting

The quality of equity research by financial analysts is a prerequisite for an efficient capital market. This study investigates the quality of earnings forecasts and stock recommendations for initial public offerings (IPOs) in Germany. The empirical study includes 12,605 earnings forecasts and 6,209 stock recommendations of individual analysts for the time period from 1997 to 2004. The focus of this study is on analysing the potential conflicts of interest that arise when the analyst is affiliated with the underwriter of an IPO. In a universal banking system these conflicts of interest are usually more pronounced and therefore interesting to investigate. The empirical findings for the German financial market suggest that earnings forecasts and stock recommendations of the analysts belonging to the lead-underwriter are on average inaccurate and biased, indicating some conflicts of interest. Moreover, the stock recommendations of the analysts that are affiliated with the lead-underwriter are often too optimistic resulting in a significant long-run underperformance for the investor. In contrast, unaffiliated analysts provide better earnings forecasts and stock recommendations that result in a superior performance for the investor.     

IPO公司预测盈利的价值相关性

会计信息是有效资本市场资源配置的重要依据。目前,价值相关性的研究主要关注会计盈余,而很少关注预测盈利。本文采用价格模型验证了我国IPO公司预测盈利的价值相关性,研究结论表明,我国IPO公司的预测盈利具有价值相关性,并且价值相关性因预测盈利的准确性、预测盈利的披露方式、IPO公司的规模以及股权流动性程度而不同。