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Voluntary Disclosure of Management Earnings Forecasts in IPO Prospectuses

Authors

  • Vijay Jog,

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       The authors are respectively from Carlton University and Wilfrid Laurier University. They thank Philip Brown, Duane Kennedy, S.P. Kothari, Yue Li, Peter Pope, Wendy Rotenberg, Bill Salatka and seminar participants at the 2002 ACCA/CBP/JBFA Capital Markets Conference for their comments. They would also like to thank participants at the Northern Finance Association Conference, the University of Toronto – Joint Capital Markets and Accounting Group Workshop, the University of Waterloo – School of Accountancy Workshop and a Concordia University seminar for their comments on an earlier version of this paper. They thank Carleton University and the Social Sciences and Humanities Research Council for financial support, and Varsha Deshpande and Shantanu Dutta for providing excellent research assistance.

  • Bruce J. McConomy

    Corresponding author
      Bruce J. McConomy, School of Business & Economics, Wilfrid Laurier University, Waterloo, Ontario, Canada, N2L 3C5.
      e-mail: bmcconom@wlu.ca
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       The authors are respectively from Carlton University and Wilfrid Laurier University. They thank Philip Brown, Duane Kennedy, S.P. Kothari, Yue Li, Peter Pope, Wendy Rotenberg, Bill Salatka and seminar participants at the 2002 ACCA/CBP/JBFA Capital Markets Conference for their comments. They would also like to thank participants at the Northern Finance Association Conference, the University of Toronto – Joint Capital Markets and Accounting Group Workshop, the University of Waterloo – School of Accountancy Workshop and a Concordia University seminar for their comments on an earlier version of this paper. They thank Carleton University and the Social Sciences and Humanities Research Council for financial support, and Varsha Deshpande and Shantanu Dutta for providing excellent research assistance.


Bruce J. McConomy, School of Business & Economics, Wilfrid Laurier University, Waterloo, Ontario, Canada, N2L 3C5.
e-mail: bmcconom@wlu.ca

Abstract

Asymmetric information and mechanisms for its resolution in the initial public offering (IPO) process are subjects of extensive research and debate. In this paper, we investigate the impact of one such mechanism, namely voluntary disclosure of management earnings forecasts by issuers of IPOs, as a means of reducing asymmetric information as well as ex ante uncertainty. Our focus is on the relative importance of this voluntary disclosure mechanism on both IPO underpricing and post-issue return performance. Our results indicate that management earnings forecasts provide important and incremental information compared to other means of reducing asymmetric information, and these disclosures appear to improve the environment of IPO issuance. For example, our underpricing results show that firms that choose to provide forecasts leave ‘less money on the table’ with a lower degree of underpricing. In terms of post-issue performance, firms whose forecasts turn out to be optimistic are penalized significantly relative to other forecasters and non-forecasters.

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