IFRS adoption, corporate governance and management earnings forecasts

Abstract

Purpose This paper aims to examine whether International Financial Reporting Standards (IFRS) adoption and corporate governance attributes increase the management earnings forecasts’ accuracy disclosed in prospectuses for French Initial Public Offerings (IPOs). Design/methodology/approach The analysis is based on cross-sectional regression explaining the absolute forecast errors by using 45 French firms that made IPOs between 2005 and 2016 in two French financial markets: Euronext and Alternext. Findings In agreement with the agency theory and the signaling theory, the authors find that the IFRS adoption and the effective corporate governance, proxied by the board characteristics, increase the accuracy of management forecasts. As a result, this latter gives a credible signal in constructing and sustaining shareholders’ trust on the transparency and the reliability of such financial information. Research limitations/implications It is plausible that the limited size of the sample represents a limitation of this study. Another limitation is that no other corporate governance attributes such as board meeting frequency, audit committee measures and ownership structure are used. Practical implications Shareholders can take benefit from management forecasts accuracy to structure their investment portfolios efficiently to allocate their funds more effectively and mitigate the costs of adverse selection that they have to face. Furthermore, the authors expect the findings to be interesting to IPO firms, as this study highlights the efficiency of larger and independent boards in decreasing managerial discretion, increasing disclosure quality and supervising management. The results could encourage GAAP-adopters countries to move toward IFRS, as this research reinforces the role of IFRS in enhancing the quality of financial disclosure by offering the required information for shareholders. Originality/value This study is important because the potential investors should assess management earnings forecasts accuracy before they consider it when evaluating IPO firms. Also, this paper has some implications for the financial market. It is recommended that future investors pay more attention, when assessing the accuracy of management earnings forecasts, to the accounting regulations of the financial reporting along with the corporate governance mechanisms. Moreover, this study could incite French regulators to revise the AFEP-MEDEF code. Under this code, it could insist that larger and independent boards are more effective in performing their governing roles than smaller boards.

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

“…For this purpose, the company is required to improve its information context through the publication of quality forecasts (Labégorre and Boubaker, 2005). In agreement with the agency theory and the signaling theory, Hlel et al (2020) find that the IFRS adoption and effective corporate governance, proxied by the board characteristics, increase the accuracy of management forecasts.…”

Corporate governance and investment efficiency in Indonesia: the moderating role of industry competition

“…As asserted in agency theory, corporate governance is an important mechanism to prevent opportunistic management behaviour (Hlel et al , 2020). Corporate governance is a series of supervisory mechanisms that protect investors’ interests (La Porta et al , 2000; Utama et al , 2017).…”

Analysts’ forecasts between last consensus and earning announcement date

“…Despite the value relevance of analysts’ forecasts, prior research has also shown that stock price reactions to earnings announcements are stronger than the response to analysts’ forecast revisions (Bartov et al , 2002; Esterer and Schröder, 2014). Consistent with the notion that earnings figures are important to investors (Ammer and Ahmad-Zaluki, 2017; Hlel et al , 2019), recent research shows that firms actively manage their earnings (or analysts’ expectations) to MBE forecast consensus (Bartov et al , 2002; Kim and Song, 2015; Masumoto, 2002; Zhang et al , 2018). According to Huang et al (2017), when the firm’s reported quarterly earnings equals the most recent consensus analyst forecast for that quarter or exceeds it by a cent, the firm is considered as having “met” its analyst earnings forecast.…”

“…As suggested by Chang et al (2016) and Schipper (1991), prior studies failed to consider the full decision context and economic incentives that affect analysts’ forecasts. Although analysts’ decision context is an area where research is relatively lacking, there are some follow on studies that suggest that analysts are motivated to make more accurate forecasts (Ahmed et al , 2020; Hlel et al , 2019; Mikhail et al , 1999; Rahman et al , 2019; Wang et al , 2017). Consistent with the view that analysts’ objective is to make more accurate forecasts, Hong et al (2020) and Previts and Bricker (1994) observed that analysts prefer following financial institutes with effective earnings management.…”