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Abstract:
In a relatively less litigious environment like Australia, it is common to find IPO firms that voluntarily provide forecasts in their prospectus. Using 158 Australian industrial IPOs listed from 1991 to 1997, we examine the impact of the disclosure and accuracy of earnings and dividend forecasts on equity pricing. Our results show that IPO firms' disclosure policy is not related to their initial and long-run valuation. However, the market appears to price managers' ability to forecast: firms with inaccurate earnings and dividend forecasts, especially those that fall short of their forecasts, experience adverse price reactions surrounding the day when the actual figures are released. Our results also show a significant relationship between forecast errors and IPO firms' post-listing performance. Further analysis shows that this relationship is driven mainly by the announcement effect.

Forecast accuracy, IPOs, initial market valuation, announcement effects, long-run performance

Abstract:
In a relatively less litigious environment like Australia, it is common to find IPO firms that voluntarily provide forecasts in their prospectus. Using 158 Australian industrial IPOs listed from 1991 to 1997, we examine the impact of the disclosure and accuracy of earnings and dividend forecasts on equity pricing. Our results show that IPO firms' disclosure policy is not related to their initial and long-run valuation. However, the market appears to price managers' ability to forecast: firms with inaccurate earnings and dividend forecasts, especially those that fall short of their forecasts, experience adverse price reactions surrounding the day when the actual figures are released. Our results also show a significant relationship between forecast errors and IPO firms' post-listing performance. Further analysis shows that this relationship is driven mainly by the announcement effect.

Forecast accuracy, IPOs, initial market valuation, announcement effects, long-run performance

Abstract:
Recent media releases have placed enormous strains on the credibility of the underwriting industry. It has been alleged that underwriters in the US and UK collude and fix underwriting fees. In contrast to recent evidence on the underwriting spread in the US (Chen and Ritter, 2000), we find that the Australian underwriting fee is not clustered at one particular percentage. Using 282 underwritten industrial IPOs from 1980 to 1996, our results show that underwriters systematically price their services according to firm-specific variables such as the offer size, the subscription period of the issue, the retained ownership after the IPO, the offer price, and whether underwriters receive options as part of their compensation.

Abstract:
Recent media releases have placed enormous strains on the credibility of the underwriting industry. It has been alleged that underwriters in the US and UK collude and fix underwriting fees. In contrast to recent evidence on the underwriting spread in the US (Chen and Ritter, 2000), we find that the Australian underwriting fee is not clustered at one particular percentage. Using 282 underwritten industrial IPOs from 1980 to 1996, our results show that underwriters systematically price their services according to firm-specific variables such as the offer size, the subscription period of the issue, the retained ownership after the IPO, the offer price, and whether underwriters receive options as part of their compensation.

Abstract:
Do investors price tax rebates on dividends? Since President George W. Bush's proposal to eliminate taxation of dividends at both the corporate and personal tax levels, there is a revival of interest on how dividend, corporate and personal taxes affect the pricing of equities. This study explores a setting, Australia, where corporate and personal tax systems are fully integrated in the form of an imputation tax system to examine the pricing of franked (tax-free) dividends using a valuation approach.

A procedure is developed to simultaneously estimate the value of franked dividends, the cost of equity, and growth rates implied by share prices, book values, and analysts' earnings forecasts. The analysis is done on an after corporate tax but before personal tax basis by incorporating tax credits as part of payoffs. The estimation procedure employs a system of two equations that are equivalent price expressions based on different periods of earnings forecasts. Via simple manipulation and rearrangement, the system of equations leads to two (regression) relations with four estimates (two constant terms and two slope coefficients). The four estimates are functions of the implied value of franked dividends, the implied value of required rate of return, and the two implied growth rates based on different periods of earnings forecasts for a portfolio of firms.

The estimation procedure is performed on a portfolio of firms followed by I/B/E/S from January 1st 1993 to December 31st 1999. The results show that investors do price the tax rebates with the estimates of a dollar of franked dividends being statistically greater than $1. In the estimation procedure, optimistic bias inherent in earnings forecasts would drive the estimate of market value of franked dividends upwards. Another estimation procedure is performed in a setting without imputation tax credits (i.e., the US) to examine the extent to which investors adjust one-year-ahead earnings downwards, knowing that these forecasts are, on average, optimistically biased. To the degree that forecast biases are comparable across the two countries (i.e., Australia and the US), the optimistic bias in earnings forecasts alone cannot fully explain the estimate of the value of franked dividends being greater than $1.

Dividend imputation, cost of capital

Abstract:
We examine analysts' implied expected rates of return for recent IPO firms relative to more seasoned firms. We document that analysts have relatively more optimistic expectations about recent IPO firms relative to seasoned firms, and these optimistic expectations persist, on average, for four years following the IPO. We also document that the market has optimistic expectations for recent IPO firms relative to more seasoned firms, but only for the first year following listing. Our results are robust to controls for industry, size, book-to-market, the age of the firm, analysts' expected long-term growth, the number of analysts following the firms, the level of dispersion in analysts' forecasts, and external financing activities. Our results suggest that analysts' retain optimistic expectations regarding recent IPO firms relative to more seasoned firms for an extended period of time after the IPO event.

IPOs, analysts expectations