Article2020

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

Faten Ben Ahmed · Bassem Salhi · Anis Jarboui

15 citations0/0 files storedJournal of financial reporting & accounting

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Auditing, Earnings Management, Governance Corporate Finance and Governance Corporate Governance and Financial Management

Abstract

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.

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References

1980Agency Problems and the Theory of the Firm 2002Audit committee, board of director characteristics, and earnings management 2003Earnings management and corporate governance: the role of the board and the audit committee 1998Earnings Management and the Long‐Run Market Performance of Initial Public Offerings 2004Audit Committee Characteristics and Restatements 2004The Effect of Audit Committee Expertise, Independence, and Activity on Aggressive Earnings Management 2005The Association between Outside Directors, Institutional Investors and the Properties of Management Earnings Forecasts 2005The Association between Corporate Boards, Audit Committees, and Management Earnings Forecasts: An Empirical Analysis

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