The accuracy of management profit forecasts in IPO prospectuses

2016 ◽  
Vol 6 (1) ◽  
pp. 2-12 ◽  
Author(s):  
Tanweer Hasan ◽  
Muliaman Hadad ◽  
Kamran Ahmed
Keyword(s):  
Initial Public Offerings ◽  
Forecast Error ◽  
Emerging Market ◽  
Forecast Accuracy ◽  
Forecast Errors ◽  
Sample Period ◽  
Sources Of Information ◽  
Forecast Horizon ◽  
Content Type ◽  
Explanatory Variables

Purpose – The purpose of this paper is to measure the accuracy of management profit forecast in initial public offerings (IPO) prospectuses and investigate the determinants of any observed forecast error in Indonesia. Design/methodology/approach – A sample of 105 Indonesian IPO firms over a ten-year period, 1999-2008, is used in the present study. The accuracy of management profit forecasts, or forecast errors, in IPO prospectuses is calculated, following Lee et al. (2006), over the ten-year sample period. Then, a multivariate model, following the extant literature, is used to identify the determinants of any observed forecast error in Indonesia. Findings – A mean (median) forecast error of 19 percent (9 percent) is reported over the entire sample period. Multivariate analysis shows that, among the explanatory variables used in the present study, forecast horizon and management optimism seem to be the most significant determinants of forecast error in Indonesia. Research limitations/implications – The ordinary, specifically small, investors in Indonesia lack the sophistication needed to evaluate new issues while alternative independent sources of information or analysis on IPOs are virtually non-existent. Consequently, whether the forecasts made by the managers during IPOs are reliable or not is of particular importance in Indonesia. Originality/value – Indonesia is a significant emerging market in Asia. However, to date, no published work has examined the accuracy of management profit forecasts or forecast errors in this market. The present study attempts to fill this gap in the literature and is the first to capture the magnitude/degree of forecast accuracy or error and investigate the determinants of the documented forecast error in Indonesia using a sample of 105 IPO firms over the period 1999 through 2008.

scholarly journals Do analysts understand accruals’ persistence? Evidence revisited

2019 ◽  
Vol 21 (1) ◽  
pp. 38-59
Author(s):  
Ivana Raonic ◽  
Ali Sahin
Keyword(s):  
Forecast Error ◽  
Forecast Accuracy ◽  
Earnings Forecasts ◽  
Cash Flows ◽  
Share Price ◽  
Future Research ◽  
Forecast Errors ◽  
Content Type ◽  
Future Earnings ◽  
Money Managers

Purpose The purpose of this paper is to revisit the question of whether analysts anticipate accruals’ predicted reversals (or persistence) of future earnings. Prior evidence documents that analysts who provide information to investors are over optimistic about firms with high working capital (WC) accruals. The authors propose that empirical models using WC accruals alone may be incomplete and hence not entirely appropriate to assess the level of analysts’ understanding of accruals. The authors argue that analysts’ optimism about WC accruals might not be due to their lack of sophistication, but rather driven by incomplete accrual information embedded in forecast accuracy tests. Design/methodology/approach The authors use non-financial US firms for the period between 1976 and 2013. The authors define earnings forecast errors as the analysts’ consensus earnings forecasts minus the actual earnings provided by IBES deflated by share price from CRSP. The authors carry out forecast error regressions on individual accrual components by decomposing total accruals into categories. The authors perform the tests across 12 months starting from the initial analysts’ forecasts, which are generally issued in the first month after the prior period earnings announcement date. The final sample contains 48,142 firm–year observations per month. Findings The empirical tests show no correlation between analysts’ forecast errors and revised total accruals. The findings are robust to different samples, periods, model specifications, decile ranked accruals, high accruals, absolute forecast errors, controlling for cash flows (CF) and high accounting conservatism. The findings imply that if analysts are to achieve more accurate forecasts, they should be considering all rather than some accrual components. The authors interpret this evidence as an indication of analysts’ relative sophistication with respect to accruals. Research limitations/implications The authors recognise that analysts’ correct anticipation of accruals’ persistence does not mean that their earnings forecasts are entirely free of bias. Analysts can make forecast errors for various reasons including strategic biases. For instance, the tests show pessimistic forecast errors with respect to CF, which is in line with similar findings in prior research (Drake and Myers, 2011). Hence, the authors suggest that future research examine this correlation in greater depth as CF components are with the highest level of persistence, and hence should be predicted most accurately. Practical implications The results imply that the argument about analysts’ lack of sophistication with respect to accruals’ persistence is not warranted. The results imply that forecasts appear to contribute to market efficiency. Another implication is that analysts seem to utilise all relevant accrual information in their forecasts, hence traditional accrual definition should be revised in future studies. Key inferences of the paper imply that the growing use of analysts’ reports by institutional investors and money managers in their decision-making processes is justified despite the debate in the prior literature on the role and the reputation of analysts as surrogates of market expectations. Originality/value The research sheds a new light on the question whether sell-side security analysts are able to anticipate the persistence of accruals in future earnings.

Corporate governance and earnings forecast accuracy in IPO prospectuses: an empirical analysis

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Faten Ben Ahmed ◽  
Bassem Salhi ◽  
Anis Jarboui
Keyword(s):  
Corporate Governance ◽  
Initial Public Offering ◽  
Audit Quality ◽  
Forecast Error ◽  
Emerging Market ◽  
Forecast Accuracy ◽  
Financial Statements ◽  
Small Sample ◽  
Earnings Forecast ◽  
Content Type

Purpose The purpose of this study is to present an extension to the research area dealing with the Tunisia initial public offering (IPO) associated earnings management forecasts, by an examination of the corporate governance mechanisms and earnings forecast accuracy relating impacts. Design/methodology/approach The authors use a multiple regression technique (FGLS) to estimate the effect of corporate governance structures and audit quality on earnings forecast accuracy. A sample of 33 IPO companies (165 firm-year observations) collected over the period ranging between 2011 and 2015 was applied. Findings The finding of this study reveals that the companies displaying a respectable audit committee size have a significant level of earnings forecast accuracy. Similarly, the accuracy level associated with IPO earnings forecasts is positively influenced by the use of the brand-name auditor. Research limitations/implications This study is based on a small sample from a single jurisdiction and limited time period. In fact, the findings examine how financial statements are measured and reported and assess additional regulation to protect investors and understand as well as manage earnings forecast accuracy in IPO prospectuses. Practical implications The findings of the study provide some implications for regulators, financial analysts, investors and users of financial statements, particularly who are investigating in potentially IPO firms. This study has an implication for market regulators who suggest that a requirement to publish very detailed forecast information would improve market efficiency by reducing the forecast error. Originality/value Previous studies on this subject carried out in other countries with a regulatory framework differ from that of Tunisia, which obligatorily obliges the publication of the forecasts in the prospectus of IPO and capital increase. This is one of the most important studies that simultaneously tests the impacts of corporate governance and audit quality on earnings forecast accuracy in an emerging market, and the results of this study may give strength to Tunisian as well as other developing countries.

The influence of narrative disclosure readability, information ordering and graphical representations on non-professional investors' judgment: evidence from an emerging market

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Dalia Hussein El-Sayed ◽  
Eman Adel ◽  
Omar Elmougy ◽  
Nadeen Fawzy ◽  
Nada Hatem ◽  
...  
Keyword(s):  
Impression Management ◽  
Undergraduate Students ◽  
Emerging Market ◽  
Recency Effect ◽  
Graphical Representations ◽  
Sources Of Information ◽  
Multiple Sources ◽  
Content Type ◽  
Future Performance ◽  
Information Order

PurposeThis study examines whether manipulation in attributes of corporate narrative disclosures and the use of graphical representations can bias non-professional investors' judgment towards firms' future performance, in an emerging market context.Design/methodology/approachThe authors conduct three different experiments with a 2 × 2 between-subjects design, using accounting and finance senior undergraduate students to proxy for the non-professional investors.FindingsResults show that simple (more readable) disclosures improve non-professional investors' judgment towards firms' future performance. In addition, it is found that non-professional investors are prone to a recency effect from the intentional ordering of narrative information, when using complex (less readable) narratives. However, no primacy effect is found, when using simple (more readable) disclosures. The results further provide evidence that the inclusion of graphical representations, along with the manipulated narrative disclosures, can moderate the recency effect of information order, when using less readable and complex narrative disclosures.Research limitations/implicationsThe results reveal that although the content of corporate disclosures can be objective, neutral and relevant, manipulation in textual features and the use of graphical presentations, can interact to impact how non-professional investors perceive and process the disclosed information. This study provides an Egyptian evidence regarding this issue, as the majority of prior studies concentrate on developed capital markets. In addition, it contributes to prior studies evaluating the appropriateness of the Belief Adjustment Model predictions about the effect of textual presentation order on decision-making, by providing evidence from an emerging market.Practical implicationsResults attempt to increase the awareness of investors and encourage them to use multiple sources of information to avoid the probable bias that can result from management's manipulation of narratives. In addition, the study could be of interest to regulators and standard-setters, where the results reveal the need for guidelines and regulations to guide the disclosure of narrative information and the use of graphical information in corporate reports.Originality/valueTo the best of the authors' knowledge, this is the first study to examine the effect of two impression management strategies in narrative disclosures (readability and information order), along with the use of graphical representations, on non-professional investors' judgment in an emerging market, like Egypt.

Social media information and analyst forecasts

2019 ◽  
Vol 46 (2) ◽  
pp. 197-216
Author(s):  
Abu Amin ◽  
Rajib Hasan ◽  
Mahfuja Malik
Keyword(s):  
Social Media ◽  
Fixed Effects ◽  
Information Dissemination ◽  
Early Period ◽  
Forecast Accuracy ◽  
Forecast Errors ◽  
Content Type ◽  
Information Generation ◽  
Corporate Social

Purpose The purpose of this paper is to examine whether corporate social media information helps improve analysts’ forecast accuracy. Design/methodology/approach This study uses hand-collected information on S&P 500 firms’ official Facebook pages and uses posts and reactions to such posts to measure corporate Facebook information. Multivariate regression models are estimated to test the relationship between analysts’ forecast accuracy and corporate Facebook information. Findings The results indicate that analysts forecast accuracy is unresponsive to posts. However, analyst forecast errors are decreasing in reactions to posts. These findings are robust to the inclusion of control variables, firm and time fixed effects, and alternative specifications of forecast errors and different pre-forecast time windows. Research limitations/implications This study has some limitations. It focuses only on the S&P 500 firms, which are large and generally provide better information to the market. The sample period coincides with the early period of the corporate Facebook culture. However, more recent data sets are likely to provide stronger results. Practical implications The findings of this study provide support for “information generation” role of social media and show that reactions to corporate Facebook posts are the new and unique information generated from corporate social media activities, which help information intermediaries in improving their forecasting accuracy. Originality/value This study makes an important contribution to the literature by separating the information dissemination role of social media from information generation role and establishes the first evidence on how corporate social media information affects forecast accuracy of financial analysts.

Human behavior analysis under financial information science

2018 ◽  
Vol 36 (4) ◽  
pp. 685-704
Author(s):  
Feng Jui Hsu ◽  
Yu-Cheng Chen
Keyword(s):  
Earnings Management ◽  
Information Science ◽  
Forecast Error ◽  
Forecast Accuracy ◽  
Financial Information ◽  
Real Earnings Management ◽  
Analyst Forecast ◽  
Management Behavior ◽  
Content Type ◽  
Financial Characteristics

PurposeThe purpose of this paper is to investigate the relationships among corporate social responsibility (CSR), analyst forecast accuracy and firms’ earnings management behavior using US-based firms.Design/methodology/approachThe authors use the Kinder, Lydenberg, Domini (KLD) database to construct CSR performance scores and divide all firms into ten groups from high to low as a proxy for CSR performance. The authors obtained an initial sample of 33,364 firm-year observations from 1991 to 2012. Filtering for records which exist in the KLD, Compustat, and Center for Research in Security Prices databases lefts a total of 16,807 firm-year observations and CSR evaluation reports for 5,896 firms.FindingsThe authors find that high CSR-score firms have lower rates of analyst forecast error than their low CSR-score counterparts, suggesting that CSR performance is a useful means of forecasting earnings. Furthermore, firms with better CSR performance have significantly lower accrual-based earnings management behavior. However, the level of the manipulation behavior of real earnings management (REM) activities increased significantly in better CSR firms, suggesting that high CSR-score firms substituted REM methods for accrual-based methods. REM methods are consistent with the stipulations of the Sarbanes-Oxley Act and allow high CSR-score firms to better manipulate earnings behavior. These results hold after the authors control for various factors related to firm financial characteristics.Originality/valueOverall, the findings have important implications for investors and regulators to more easily assess firms’ earnings manipulation behavior and earnings stability under CSR performance and financial information in financial markets.

IFRS adoption, corporate governance and management earnings forecasts

2020 ◽  
Vol 18 (2) ◽  
pp. 325-342 ◽  
Author(s):  
Khawla Hlel ◽  
Ines Kahloul ◽  
Houssam Bouzgarrou
Keyword(s):  
Corporate Governance ◽  
Initial Public Offerings ◽  
Financial Reporting ◽  
Audit Committee ◽  
Earnings Forecasts ◽  
Forecast Errors ◽  
Management Forecasts ◽  
Management Earnings Forecasts ◽  
Content Type ◽  
Ifrs Adoption

Purpose This paper aims to examine whether International Financial Reporting Standards (IFRS) adoption and corporate governance attributes increase the management earnings forecasts’ accuracy disclosed in prospectuses for French Initial Public Offerings (IPOs). Design/methodology/approach The analysis is based on cross-sectional regression explaining the absolute forecast errors by using 45 French firms that made IPOs between 2005 and 2016 in two French financial markets: Euronext and Alternext. Findings In agreement with the agency theory and the signaling theory, the authors find that the IFRS adoption and the effective corporate governance, proxied by the board characteristics, increase the accuracy of management forecasts. As a result, this latter gives a credible signal in constructing and sustaining shareholders’ trust on the transparency and the reliability of such financial information. Research limitations/implications It is plausible that the limited size of the sample represents a limitation of this study. Another limitation is that no other corporate governance attributes such as board meeting frequency, audit committee measures and ownership structure are used. Practical implications Shareholders can take benefit from management forecasts accuracy to structure their investment portfolios efficiently to allocate their funds more effectively and mitigate the costs of adverse selection that they have to face. Furthermore, the authors expect the findings to be interesting to IPO firms, as this study highlights the efficiency of larger and independent boards in decreasing managerial discretion, increasing disclosure quality and supervising management. The results could encourage GAAP-adopters countries to move toward IFRS, as this research reinforces the role of IFRS in enhancing the quality of financial disclosure by offering the required information for shareholders. Originality/value This study is important because the potential investors should assess management earnings forecasts accuracy before they consider it when evaluating IPO firms. Also, this paper has some implications for the financial market. It is recommended that future investors pay more attention, when assessing the accuracy of management earnings forecasts, to the accounting regulations of the financial reporting along with the corporate governance mechanisms. Moreover, this study could incite French regulators to revise the AFEP-MEDEF code. Under this code, it could insist that larger and independent boards are more effective in performing their governing roles than smaller boards.

COVID-19 pandemic sentiment and stock market behavior: evidence from an emerging market

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Byomakesh Debata ◽  
Kshitish Ghate ◽  
Jayashree Renganathan
Keyword(s):  
Stock Market ◽  
Emerging Market ◽  
Sample Period ◽  
Market Behavior ◽  
Market Returns ◽  
Full Sample ◽  
Content Type ◽  
Time Frequency ◽  
Search Volume ◽  
Google Search

PurposeThis study aims to examine the relationship between pandemic sentiment (PS) and stock market returns in an emerging order-driven stock market like India.Design/methodology/approachThis study uses nonlinear causality and wavelet coherence techniques to analyze the sentiment-returns nexus. The analysis is conducted on the full sample period from January to December 2020 and further extended to two subperiods from January to June and July to December to investigate whether the associations between sentiment and market returns persist even several months after the outbreak.FindingsThis study constructs two novel measures of PS: one using Google Search Volume Intensity and the other using Textual Analysis of newspaper headlines. The empirical findings suggest a high degree of interrelationship between PS and stock returns in all time-frequency domains across the full sample period. This interrelationship is found to be further heightened during the initial months of the crisis but reduces significantly during the later months. This could be because a considerable amount of uncertainty regarding the crisis is already accounted for and priced into the markets in the initial months.Originality/valueThe ongoing coronavirus pandemic has resulted in sharp volatility and frequent crashes in the global equity indices. This study is an endeavor to shed light on the ongoing debate on the COVID-19 pandemic, investors’ sentiment and stock market behavior.

Firm innovation and access to finance: firm-level evidence from India

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Parneet Kaur ◽  
Navneet Kaur ◽  
Paras Kanojia
Keyword(s):  
Small Firms ◽  
Small And Medium Enterprises ◽  
Emerging Market ◽  
Innovation Performance ◽  
Innovation Activity ◽  
Firm Level ◽  
Firm Innovation ◽  
Content Type ◽  
Explanatory Variables ◽  
The Impact

Purpose Based on 9,281 firm-level survey data on micro, small and medium enterprises (MSMEs) in India, this study aims to investigate how access to different finance sources and collateral requirement facilitates the firm’s innovation activity across industries. Design/methodology/approach This paper used ordered logit regression models using Stata software for explanatory variables to measure the impact of explanatory variables on firm innovation performance. Firms’ innovation performance is measured through the aggregate innovation index obtained by adding up the no. of “new-to-firm” activities. Findings The empirical results reveal that external sources of funding impact innovation activity than other financing sources. Also, the requirement of collateral for financing impacts innovation performance significantly. This paper finds that firms funded by state-owned banks or government agency are more actively engaged in innovation activities. The firm’s size, ownership structure and location of the firm also show the varying innovation performance. This paper found variation in innovation performance across industries as well. Practical implications First, the present study underlines the significance of funding sources. Second, minimizing the need for collateral to obtain external finance boosts small firms’ innovation activity and will also trigger overall economic growth. Finally, while making policies for ownership transformation of state-owned institutions, policymakers should discuss these policies’ impact on innovative firms. Originality/value What facilitates innovation performance in an emerging market is missing in the literature for MSMEs, largely due to lack of data. It is reasonable not to generalize innovation knowledge in large firms to small firms because of the constraints, particularly MSMEs face.

Absolute Forecast Errors of Earnings in Malaysian IPO Prospectuses: The Impact of Ethnic Diversity

2014 ◽  
Vol 68 (3) ◽  
Author(s):  
Mohammed Abdullah Ammer ◽  
Nurwati A. Ahmad-Zaluki
Keyword(s):  
Ethnic Diversity ◽  
Boards Of Directors ◽  
Forecast Error ◽  
Forecast Accuracy ◽  
Earnings Forecasts ◽  
Ordinary Least Squares ◽  
Audit Committees ◽  
Earnings Forecast ◽  
Forecast Errors ◽  
The Impact

The main focus of this paper is the earnings forecast, a vital information included in IPO prospectus. Specifically, our paper examined the impact of ethnic diversity groups on the boards of directors and audit committees in terms of earnings forecast accuracy. We are motivated by the lack of prior studies related to investigating IPO earnings forecast. Cross-sectional Ordinary Least Squares (OLS) modeling was conducted on 190 Malaysian IPOs from 2002 to 2012. For the evaluation of earnings forecast accuracy, we mathematically used the metric of Absolute Forecast Error (AFER). Moreover, for the test of robustness, we used the metric of Squared Forecast Error (SQFER) as error measurement, as it mostly deals with large errors. The empirical results indicate that the ethnic diversity groups on boards and audit committees have an impact on the accuracy of earnings forecasts. However, the evidence is significant for Chinese and Malay serving on boards but insignificant in terms of Chinese and Malay serving on audit committee. The findings indicate that multi-ethnic groups in Malaysian IPO companies could hinder the capability of IPO companies to achieve accurate earnings forecasts in their prospectuses.

scholarly journals Impact of the management strategy on the sizing of a collaborative system

2015 ◽  
Vol 34 (6) ◽  
pp. 1807-1824 ◽  
Author(s):  
R. Le Goff Latimier ◽  
B. Multon ◽  
H. Ben Ahmed
Keyword(s):  
Management Strategy ◽  
Forecast Error ◽  
Added Value ◽  
Stochastic Dynamic ◽  
Forecast Errors ◽  
Production Forecast ◽  
Content Type ◽  
Optimal Sizing ◽  
Collaborative System ◽  
Charging Strategy

Purpose – To foster the grid integration of both electric vehicles (EV) and renewable generators, the purpose of this paper is to investigate the possible synergies between these players so as to jointly improve the production predictability while ensuring a green mobility. It is here achieved by the mean of a grid commitment over the overall power produced by a collaborative system which here gathers a photovoltaic (PV) plant with an EV fleet. The scope of the present contribution is to investigate the conditions to make the most of such an association, mainly regarding to the management strategies and optimal sizing, taking into account forecast errors on PV production. Design/methodology/approach – To evaluate the collaboration added value, several concerns are aggregated into a primary energy criterion: the commitment compliance, the power spillage, the vehicle charging, the user mobility and the battery aging. Variations of these costs are computed over a range of EV fleet size. Moreover, the influence of the charging strategy is specifically investigated throughout the comparison of three managements: a simple rule of thumb, a perfect knowledge deterministic case and a charging strategy computed by stochastic dynamic programming. The latter is based on an original modeling of the production forecast error. This methodology is carried out to assess the collaboration added value for two operators’ points of view: a virtual power plant (VPP) and a balance responsible party (BRP). Findings – From the perspective of a BRP, the added value of PV-EV collaboration for the energy system has been evidenced in any situation even when the charging strategy is very simple. On the other hand, for the case of a VPP operator, the coupling between the optimal sizing and the management strategy is highlighted. Originality/value – A co-optimization of the sizing and the management of a PV-EV collaborative system is introduced and the influence of the management strategy on the collaboration added value has been investigated. This gave rise to the presentation and implementation of an original modeling tool of the PV production forecast error. Finally, to widen the scope of application, two different business models have been tackled and compared.

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