Finding an Alternative Disclosure Path: Business Model Targets in IPO Roadshows

Abstract

IPO firms have strong incentives to provide forward-looking information, yet they do not provide forecasts in their SEC filings due to litigation risk and lack of PSLRA protection. We search for evidence that they provide quantitative forward-looking information via an alternative path, finding that more than one-third of roadshow presentations contain such information. Further, the primary forward-looking metrics are not short-term earnings forecasts but rather business model targets, i.e., estimates of long-term expense and profit margins. Consistent with firms using targets to meet investor demands while avoiding litigation, no lawsuits reference targets in roadshows, and target-providing firms are more likely to forecast once they are public. Targets in roadshows are optimistic relative to realizations five and ten years post-IPO. Despite the inaccuracy, our evidence suggests market participants find firms’ quantitative forward-looking information useful even when incentives to manipulate are high. Overall, while it is commonly assumed that IPO firms do not provide quantitative forward-looking information, we find they do, though primarily in a less formal channel and an atypical form. Further, we highlight business model targets as a form of forward-looking information overlooked by prior research.

Keywords: disclosure, litigation risk, manager forecast, IPO, roadshow, analysts, financial statement analysis

JEL Classification: G17, K22, M40