Voluntary Disclosure of Management Earnings Forecasts in IPO Prospectuses
Posted: 26 May 2003
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.
Keywords: voluntary disclosure, IPO, under pricing, post-issue performance
JEL Classification: G24, G34, G38, M41, M43, M45, D82
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