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Management earnings forecast and IPO performance: Evidence of a regime change

Lookup NU author(s): Professor Dimitrios Gounopoulos

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Abstract

Companies undertaking initial public offerings (IPOs) in Greece were obliged to include next-year profit forecast in their prospectuses, until the regulation changed in 2001 to voluntary forecasting. Drawing evidence from IPOs issued in the period 1993–2015, this is the first study to investigate the effect of disclosure regime on management earnings forecasts and IPO long-term performance. The findings show mainly positive forecast errors (forecasts are lower than actual earnings) and higher long-term returns during the mandatory period, suggesting that the mandatory disclosure requirement causes issuers to systematically bias profit forecasts downwards as they opt for the safety of accounting conservatism. The mandatory disclosure requirement artificially improves IPO share performance. Overall, our results show that mandatory disclosure of earnings forecasts can impede capital market efficiency once it goes beyond historical financial information to involve compulsory projections of future performance.

Publication metadata

Author(s): Boubaker S, Gounopoulos D, Kallias A, Kallias K

Publication type: Article

Publication status: Published

Journal: Review of Quantitative Finance and Accounting

Year: 2017

Volume: 48

Issue: 4

Pages: 1083-1121

Print publication date: 01/05/2017

Online publication date: 14/05/2016

Acceptance date: 20/04/2016

Date deposited: 13/06/2016

ISSN (print): 0924-865X

ISSN (electronic): 1573-7179

Publisher: Springer

URL: http://dx.doi.org/10.1007/s11156-016-0579-8

DOI: 10.1007/s11156-016-0579-8

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