The credibility of earnings forecasts in IPO prospectuses and underpricing
MetadataShow full item record
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: (1) a vector of determinants of credibility that are observable by market participants at the time of the issue and (2) 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 some evidence that differences in disclosure credibility across firms is priced by market participants. The quality of the firm’s governance and of the auditor and underwriter associated with the issue is found 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. They don’t add much to the credibility of the forecast itself. Our results are consistent with the negative association between management forecast disclosure and underpricing found in previous studies in different samples.