Forecasts in IPO Prospectuses: The Effect of Corporate Governance on Earnings Management

Abstract

Abstract:Prior research suggests that managers may use earnings management to meet voluntary earnings forecasts. We document the extent of earnings management undertaken within Canadian Initial Public Offerings (IPOs) and study the extent to which companies with better corporate governance systems are less likely to use earnings management to achieve their earnings forecasts. In addition, we test other factors that differentiate forecasting from nonforecasting firms, and assess the impact of forecasting and corporate governance on future cash flow prediction. We find that firms with better corporate governance are less likely to include a voluntary earnings forecast in their IPO prospectus. In addition, we find that while IPO firms use accruals management to meet forecasts; the informativeness of the discretionary accruals depends on whether or not the firm would have missed its forecast without the use of discretionary accruals.

The association between earnings forecast in IPOs prospectuses and earnings management: An empirical analysis

“…Firms with an earnings history may find it easier to provide forecasts at the time of listing, while firms with less earnings history could benefit from providing forecasts, because of the higher information asymmetry associated with such firms. Cormier et al (2014) …”

“…In Canada, Cormier, Pascale, and McConomy (2014) Cormier et al 2014). Large IPOs are known to the market, attract retail and institutional investors at the time of listing and hence understanding the motive of providing forecasts is important for these investors, especially the retailers.…”

Do Managers Use Meeting Analyst Forecasts to Signal Private Information? Evidence from Patent Citations

“…Barua et al () also find accruals management to achieve earnings benchmarks. Similarly, firms in the UK appear to use accrual management and classification shifting to just meet earnings benchmarks (Athanasakou et al., , ), and firms in Canada seem to manage earnings to meet voluntary earnings forecasts in the initial public offering setting (Cormier et al., ).…”

Corporate Governance Rating and Ownership Structure in the Case of Turkey

“…Firm-level empirical evidence has corroborated these findings: firms with better corporate governance practices have been found to have lower cost of capital ( [41,[59][60][61]), lower credit rate spreads [62], higher values, profitability, and lower risk ( [16,18]), higher dividend payouts [63], and lower earnings management [64].…”