Article1999

The Accuracy of Profit Forecasts and their Roles and Associations with IPO Firm Valuations

45 citations0/0 files storedJournal of International Financial Management and Accounting

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Auditing, Earnings Management, Governance Financial Markets and Investment Strategies Forecasting Techniques and Applications

Abstract

China's recent economic reforms include the corporatization and listing of formerly state‐owned enterprises. In order to sell shares to both domestic and foreign investors, IPOs have to overcome significant asymmetric information problems. Prospectuses for new issues in China contain forecasts of corporate profits for the next year and these forecasts can be used by investors to value companies and to make investment decisions. The study sets out to assess the accuracy of these forecasts and hence the credibility that can be attached to them. In addition to calculating various measures of accuracy and forecast superiority, we also examine the bias and rationality of the forecasts. The results show that profit forecasts are moderately accurate and they are better than time series extrapolations of historical profits. Explaining cross‐sectional differences in accuracy measures proves to be difficult. Finally, the results indicate that profit forecasts are related to company valuations and that investors predict the sign, and to some extent the magnitude, of forecast errors.

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References

1998Earnings Management and the Long‐Run Market Performance of Initial Public Offerings 1990Do Security Analysts Overreact 1994Accounting Choices of Issuers of Initial Public Offerings*1987An Information Interpretation of Financial Analyst Superiority in Forecasting Earnings 1993Initial Public Offerings, Accounting Choices, and Earnings Management*1992The Accuracy of Profits Forecasts in Initial Public Offering Prospectuses 1998IPO profit forecasts and their role in signalling firm value and explaining post-listing returns 1995THE ACCURACY AND RATIONALITY OF EARNINGS FORECASTS BY UK ANALYSTS

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