Voluntary profit forecast disclosures, IPO pricing and after-market earnings

Finance

Speaker:Paul B McGuinness, Chinese University of Hong Kong
Date: Monday 15 September 2014
Time: 2:00
Location: Constantine Leventis

Further details

Prospectus profit forecasts (PPF) constitute one fo the most important accounting disclosures relevant to firm valuation. I examine PPFs in the context of the Hong Kong market setting in which both IPO activity and PPF disclosure rates appear at notably high levels. My investigation reveals that forecasts typically 'underestimate' future earnings levels (on average, by around 7 percent). More importantly, ensuing forecast errors bear strong correlation with book-runners' initial price determinations (in relation to 'fixings' within the offer price range) and subscribers' initial secondary market returns. I also extend the related literature (Cheng and Firth, 2000; Chen, Firth and Krishnan, 2001; Jog and McConomy 2003; and Chong and Ho, 2007) through a futher channel by examining such errors' association with longer-term operating and stock returns. Study findings point to a strong connection with longer-term earnings and stock returns. Efforts are also apparent between a PPF disclosure dummy and longer-term performance. Finally, I offer support for bivariate signalling effects between PPF disclosure and pre-listing owners' retained equity levels (Hughes, 1988; and Li and McConomy,  2004). The signals' inverse association suggests that the probability of PPF disclosure is increasing in the size of public float sought.