Earnings forecasts errors in prospectuses: evidence from initial public offerings on the Warsaw Stock Exchange

Abstract

Research background: Several studies investigated the issue of accuracy of earnings fore-casts disclosed in IPO prospectus because of its importance in the investor’s decisions. Disclosing earnings forecasts can reduce information asymmetry and encourage potential investors to buy offered shares. The accuracy of earnings forecasts, and especially its deter-minants, was explored by some researchers, but for Polish companies such studies have not been conducted.Purpose of the article: The first objective of this study is to examine the bias and accuracy of earnings forecasts disclosed in IPO prospectuses by Polish companies attempting to be listed on the main market of the Warsaw Stock Exchange. The second aim of this paper is to identify the relationship between the absolute fore-cast error employed as a measure of earnings accuracy and a number of company specific characteristics such as company’s size, leverage, forecast horizon, managerial ownership, number of shares offered to investors (in relation to total shares before IPO).Methods: The empirical analysis were conducted on a sample of 102 domestic companies that performed IPOs on the main market of the Warsaw Stock Exchange during 2006-2015 and disclosed earnings forecasts in IPO prospectus. The forecast error (FER) and absolute forecast error (AFER) were adopted as a measure of accuracy of earnings forecasts. The non-parametric test was employed to achieve the adopted aims.Findings & Value added: The results show that, on average, the forecasted earnings exceed the actual earnings (i.e. the earnings forecasts are optimistic) and fore-casts are inaccurate. Moreover, the optimistic forecasts are more inaccurate than pessimistic ones. The findings of multiple regression model show that three independent variables may affect the level of absolute forecast error: the company’s size, managerial ownership and forecast horizon.

Board characteristics and earnings forecasts accuracy in IPO prospectuses

“…Regarding the controls, our results show that in most cases, dependent variables are affected by two control variables HORIZON and the company size (C_SIZE). Our findings are in line with previous studies reporting that earnings forecasts are more accurate if the forecasted horizon is shorter [Yau and Chun, 1999;Lonkani and Firth, 2005;Ibrahim and Ismail, 2015;Hasan et al, 2016] and the company size is larger [Jelic et al, 1998;Yau and Chun, 1999;Hartnett and Romcke, 2000;Abrokwa and Nkansah, 2014;Wawryszuk-Misztal, 2017].…”

Financial impact analysis of going public at the Warsaw Stock Exchange: Using Fuzzy Set Theory to understand behaviours of mature companies

“…A number of other studies indicate that the motives for the IPO implementation may consist in the efforts to build public relations; this may include, for example the visibility of the company in the media, forming the desired perception of the enterprise in the eyes of the public, or influencing the perception of the business sector in relation to its viability and risk (Brau et al, 2003, Maksimovic, Pichler, 2001Kiseľáková et al, 2015;Bikas, Saponaitė, 2018;Wawryszuk-Misztal, 2017;Valaskova et al, 2018).…”