IPO profit forecasts and their role in signalling firm value and explaining post-listing returns

The study examines the role of profit forecasts published in the prospectuses of initial public offerings. While it is very rare to see such forecasts in American IPOs, the practice is pervasive in some other countries. For example, Singaporean new issue prospectuses have an established history of providing point estimates of post-listing earnings and, since 1993, profit forecasts have been mandated by the Stock Exchange. Earnings forecasts are hypothesized to be a signal of company value and the accuracy of the forecasts are hypothesized to explain post-listing returns. Using data from new issues in Singapore during the period 1979-1992, various tests are employed to examine the relationships between profit forecasts appearing in prospectuses and market valuations. The results indicate that the earnings forecasts are a major signal of IPO value and that they are more important than other signalling mechanisms such as the retained share ownership of the entrepreneurs. The accuracies of the forecasts are positively related to post-listing stock returns. Stock returns in the three years after listing are close to zero and this contrasts with results from many other countries that find significant and substantial negative returns. The three-year post-listing stock returns are positively associated with IPO profitability.