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

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  • Ranko Jelic
  • Brahim Saadouni
  • Richard Briston

Abstract

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.

Suggested Citation

  • Ranko Jelic & Brahim Saadouni & Richard Briston, 1998. "The accuracy of earnings forecasts in IPO prospectuses on the Kuala Lumpur Stock Exchange," Accounting and Business Research, Taylor & Francis Journals, vol. 29(1), pages 57-72.
    • Handle: RePEc:taf:acctbr:v:29:y:1998:i:1:p:57-72
    DOI: 10.1080/00014788.1998.9729566
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    2. Anne Cazavan‐Jeny & Thomas Jeanjean, 2007. "Levels of voluntary disclosure in IPO prospectuses: an empirical analysis," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 6(2), pages 131-149, May.
    3. Sosnowski Tomasz & Wawryszuk-Misztal Anna, 2019. "Board characteristics and earnings forecasts accuracy in IPO prospectuses," International Journal of Management and Economics, Warsaw School of Economics, Collegium of World Economy, vol. 55(1), pages 25-39, March.
    4. Sun, Jerry & Liu, Guoping, 2009. "The impact of the CSRC Regulation No. 12-1996 on the credibility of Chinese IPO earnings forecasts," Global Finance Journal, Elsevier, vol. 20(2), pages 165-179.
    5. Li Chen & David Hay & Jingyuan Zhuang, 2020. "Initial public offering prospectus forecast errors and mandatory explanations: evidence from New Zealand," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(3), pages 2167-2202, September.
    6. Nurwati A. Ahmad‐Zaluki & Wan Nordin Wan‐Hussin, 2010. "Corporate governance and earnings forecasts accuracy," Asian Review of Accounting, Emerald Group Publishing Limited, vol. 18(1), pages 50-67, May.
    7. Malcolm Anderson, 1999. "Accounting History Publications 1998," Accounting History Review, Taylor & Francis Journals, vol. 9(3), pages 375-384.
    8. Georgia Siougle, 2007. "Earnings Forecasts Disclosed in SEO Prospectuses: Evidence from an Emerging Market," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 6(3), pages 249-267, December.
    9. McGuinness, Paul B., 2016. "Voluntary profit forecast disclosures, IPO pricing revisions and after-market earnings drift," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 70-83.
    10. Lin, Yueh-hsiang & Hu, Shing-yang & Chen, Ming-shen, 2005. "Managerial optimism and corporate investment: Some empirical evidence from Taiwan," Pacific-Basin Finance Journal, Elsevier, vol. 13(5), pages 523-546, November.
    11. Marc Deloof & Wouter De Maeseneire & Koen Inghelbrecht, 2009. "How Do Investment Banks Value Initial Public Offerings (IPOs)?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(1‐2), pages 130-160, January.
    12. Chen, Gongmeng & Firth, Michael & Krishnan, Gopal V., 2001. "Earnings forecast errors in IPO prospectuses and their associations with initial stock returns," Journal of Multinational Financial Management, Elsevier, vol. 11(2), pages 225-240, April.
    13. Manel Allaya & Narjess Toumi, 2020. "The effect of lockup on management earnings forecasts disclosure in French IPOs," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 24(2), pages 507-529, June.
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    15. Anis Mnif, 2009. "Corporate Governance And Management Earnings Forecast Quality: Evidence From French Ipos," Post-Print halshs-00459171, HAL.
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    19. Vijay Jog & Bruce J. McConomy, 2003. "Voluntary Disclosure of Management Earnings Forecasts in IPO Prospectuses," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(1‐2), pages 125-168, January.

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